by Adam Tooze
It was, one should add, a reasonable assessment, certainly if one stopped the clock in November 2012 and if one skated over America’s unfortunate role in 2010 in endorsing the first round of extend-and-pretend. This narrative was also, in the American context, a thoroughly political one. As Geithner acknowledged, 2012 was an election year. And if the financial crisis and its European aftermath had finally been contained, the Democrats deserved whatever credit was due. Since 2008 the congressional Republicans had been obstructive if not downright dangerous. Campaigning for a second term as president in 2012, Obama cashed in. Gone was the modesty that characterized his speeches in 2008–2009 in the wake of the embarrassment of the Bush presidency. Now Obama trumpeted American exceptionalism without reserve: “I see it everywhere I go, from London and Prague, to Tokyo and Seoul, to Rio and Jakarta,” he declared to a group of air force cadets in the summer of 2012. “There is a new confidence in our leadership. . . . [America remains] the one indispensable nation in world affairs. . . . I see an American century because no other nation seeks the role that we play in global affairs, and no other nation can play the role that we play in global affairs.”68 As far as international economic policy was concerned, Obama’s victory in November 2012, Bernanke’s QE3 and Draghi’s speech combined to put the seal on the narrative. Centrist liberal crisis management had prevailed. In America’s new century, diversity, world openness and technocratic pragmatism would go hand in hand.
But this reconciled narrative of crisis resolution obscures deep tensions on both sides of the Atlantic. In Europe, the eurozone had survived. Draghi was right. An important phase of state building had emerged from the crisis. But it was at an appalling economic and political cost. The governments of Italy and Greece had been overturned. Ireland and Portugal had been put on troika tutelage and Spain had escaped by the skin of its teeth. And though the acute sovereign bond crisis was over, after two years of nail-biting anxiety, consumer and business confidence were shot. Unemployment took a huge toll on eurozone demand. Fiscal policy was constrained by the German drive to balance budgets. Perversely, Germany’s trade surplus was surging at a time of plunging aggregate demand across the continent. It was a time, if there ever was one, for an active monetary policy. But stopping the bond market panic was one thing, reviving the eurozone economy another. Unlike the Fed, Draghi had no mandate. As social misery deepened, as the sense of humiliation set in, what would be the reaction across Europe? Nor was it only the “victims” who were unsatisfied. German conservatives were indignant at Merkel’s litany of compromises. In the German media, Draghi, the savior of the eurozone, faced hostility and doubt. Unless this German Euroscepticism could be overcome, there was little prospect of actually realizing the agenda of ambitious integration and institution building that Draghi had trumpeted in his London speech.
In the United States, Obama’s reelection might energize his followers. But what exactly did his new American century consist of? What would be its priorities? In his first term Obama had been preoccupied with overcoming the legacy of Bush’s mistakes and coping with the crisis. But was the crisis really over? And even if it was, did that mean that America could face the future unencumbered? Or, having survived the crisis, did America now face the same challenges that had brought Obama as a junior senator to the launch of the Hamilton Project in 2006—challenges that had only amplified and intensified since? In foreign policy circles the beginning of Obama’s second term saw an impassioned argument over American retrenchment and the foundations of its international power.69 And in economic policy too there were skeptics. Had enough really changed to make another crisis less likely? Had the tensions within the financial system really been resolved, or merely contained? If another Great Depression had been avoided, did that have the perverse effect of removing the spur to truly profound reform?70 It was not without irony that among the Cassandras one of the loudest and most compelling voices was none other than Larry Summers, Treasury secretary to Clinton and chief economic adviser to Obama until December 2010. Twelve months on from Obama’s second election victory, at an IMF event in November 2013, Summers warned: “[M]y lesson from this crisis, and my overarching lesson, which I have to say I think the world has under-internalized, is that it is not over until it is over, and that time is surely not right now.”71 He could not have known how right he would turn out to be.
Part IV
AFTERSHOCKS
Chapter 19
AMERICAN GOTHIC
Amid the banking crisis of 2008, the American motor industry had been collateral damage. With sales collapsing, GM and Chrysler were knocked to their knees. In December 2008 a truculent Congress voted down an emergency aid package, but neither Bush nor Obama thought they could let GM and Chrysler fail. These once great powerhouses of American industrialism were rescued by diverting funds originally allocated to the bank bailout. By 2013 both GM and Chrysler were back in profit. Like the rest of American big business, they weathered the storm and Chrysler celebrated its recovery in the way that corporate America does, by booking a slot to run a headline-grabbing commercial during the Super Bowl in February 2014. They wanted something that would make a splash and they commissioned the man to do it. The spot was written, directed and acted in person by Bob Dylan, the wizened bard of offbeat Americana. Against a backdrop of Hopperesque noir, Dylan delivered a striking piece of high-caliber nationalist kitsch:
Is there anything more American than America? ’Cause you can’t import original. You can’t fake true cool.
You can’t duplicate legacy. Because what Detroit created was a first and became an inspiration to the . . . rest of the world.
Yeah . . . Detroit made cars. And cars made America. Making the best, making the finest, takes conviction.
And you can’t import the heart and soul, of every man and woman working on the line.
You can search the world over for the finer things, but you won’t find a match for the American road and the creatures that live on it.
Because we believe in the zoom, and the roar, and the thrust. And when it’s made here, it’s made with the one thing you can’t import from anywhere else. American pride. So let Germany brew your beer, let Switzerland make your watch, let Asia assemble your phone.
We . . . will build . . . your car.1
His lines were all the more resonant because of what the audience could be expected to know about the place where the spot was filmed, Detroit. If the American motor industry was back from the dead, the same could not be said for Motor City.
Since its heyday in the postwar era, Detroit had long been a city in decline. At its peak it had a population of 1.8 million, of whom 500,000 were African American. Hit by deindustrialization and white flight following the 1967 riots, by 2013 the population of the urban core of Detroit had shrunk to 688,000, of whom 550,000 were African American. They were left behind in a city that was literally falling into ruin, burdened with debts running into the tens of billions of dollars. With most of the major factories that had made it one of the industrial heartlands of the world closed down, Detroit was caught in a death spiral of unemployment, racial disadvantage and unsafe and predatory financing.2 By 2013, 36 percent of Detroit’s population were classed as living below Michigan’s far from generous poverty line. The unemployment rate was 18 percent. The city was an extreme example of the doom loop in which public and private financial distress compounded each other. In 2005, of all the mortgages in Detroit, 68 percent were subprime.3 As the crisis cut a swath across America, 65,000 homes in Detroit were foreclosed. Of those, 36,400 were considered of so little value that they were simply abandoned, joining a total stock of 140,000 blighted properties. Trying to contain the contamination effect, the city demolished entire tracts. Though it received state and federal subsidies for the house-razing program, it cost Detroit $195 million. That came on top of lost tax revenues of $300 million.4 None of this could the city afford. Detroit appointed an emergency manage
r who in June 2013 filed for bankruptcy, with debts owing between $18 billion and $20 billion. It was the biggest city bankruptcy in American history.5
As viewers of Dylan’s Chrysler spot knew, Detroit was an extreme case, but it was not alone. Former industrial cities and towns across America were struggling. A few went bankrupt. In 2011 Jefferson County, Alabama, which included the steel city of Birmingham, had filed. In 2012 it was the turn of Stockton and San Bernardino, California. These were poorly governed places, burdened with the side effects of America’s ramshackle welfare state, with economies struggling against long-term decline or the immediate impact of the real estate bust. They were far from being carbon copies of northern postindustrial Detroit. But taken together they symbolized the bewildering turn from American Dream to American nightmare.
It wasn’t new news. Already in the late 1970s, Bruce Springsteen had offered a mournful soundtrack for postindustrial America.6 In 2006 Obama had reminded the bigwigs of the Hamilton Project of the harsh realities of “people in places like Decatur, Illinois, or Galesburg, Illinois. . . . This is not a bloodless process,” he had said. But for most of Obama’s first term it wasn’t the worries of such places that preoccupied economic policy. It was the fight to save Wall Street and global finance. The protests of 2011 and their politicization of inequality had begun to change the conversation, but it was in the eighteen months following Obama’s reelection in November 2012 that the sense of American malaise reached a new pitch.7 With the crisis no longer dominating the horizon, the concerns about America’s long-term trajectory that had worried liberal centrists already in the early 2000s, the sense that things weren’t “normal,” came roaring back.
I
One unexpected but symptomatic manifestation was Larry Summers’s minatory speech at the IMF in November 2013.8 His subject was the recovery and its deeply disappointing pace. American policy makers might congratulate themselves that they were leading the Europeans out of the recession and they were right to do so. Since 2010 Europe’s economic record had been even worse. But America’s own recovery was the slowest on record. On the “plucking model” of business cycles, after a downward shock as severe as that in 2008, one might have expected the rebound to be vigorous. In 2009–2010 the recovery had started strongly, but since then economic growth had relapsed to a depressing extent. Where was the “bounce”? What was wrong?
Growth Disappointing: Potential GDP Estimates of 2007 and 2013 Compared to Actual GDP (2013 Dollars)
Source: Taken from L. H. Summers, “U.S. Economic Prospects: Secular Stagnation, Hysteresis, and the Zero Lower Bound,” Business Economics 49, no. 2 (2014): 65–74. Data: CBO.
The conventional view was that the United States was suffering from the aftereffects of an exceptionally severe financial crisis. This was no ordinary business cycle. It would take time for markets and balance sheets to recover.9 It was precisely to avoid such hangovers that economists like Reinhart and Rogoff argued for financial restraint. If you avoided the credit bubble and the excessive upswing, you might avoid the bust. Keynesians like Krugman insisted that this was all very well, but the recovery had been needlessly slowed by the premature shift to austerity. As Krugman put it punchily, “[I]t all went wrong in 2010.”10 The global shift to austerity for which Reinhart and Rogoff had been the cheerleaders reduced the recovery to an agonizing crawl. Bernanke’s QE could compensate to some degree, but it could not make up for the shortfall in aggregate demand.
These were the parameters of the economic policy debate familiar since 2009 and long before. What they did not capture was the sense that a deeper and more serious problem was afflicting America’s economy and the society built on it. The hypothesis that Summers suggested to his audience at the IMF in November 2013 was disconcerting and unfamiliar; so jarring, in fact, that Summers, who is not given to either modesty or self-doubt, acknowledged, “[T]his may all be madness, and I may not have this right at all.” But in light of the data, the question had to be put: What if the inadequate recovery was not simply down to policy failure? What if there was a deeper problem, a chronic shortfall in the demand for investment relative to the supply of savings, resulting in a sustained condition of “secular stagnation”?
To see the force of this argument, Summers invited his surprised audience to look back to the period before the crash. In retrospect, everyone agreed that monetary policy before 2008 had been “too easy. . . . [T]here was a vast amount of imprudent lending going on. Almost everybody believes that wealth, as it was experienced by households, was in excess of its reality. Too easy money, too much borrowing, too much wealth.” But if that were the case, one would have expected the American economy to have been on a dramatic bull run. It was not. Despite the excesses of the housing boom, growth up to 2008 had been average. Indeed, when compared with the 1950s and 1960s it had been slow, which is why places like Detroit were in such a precarious position. “Unemployment wasn’t under any remarkably low level. Inflation was entirely quiescent. So somehow, even a great bubble wasn’t enough to produce any excess in aggregate demand.” So imagine, Summers continued the train of thought, “how satisfactory” the performance of the US economy would have been in the early 2000s “in the absence of a housing bubble, and with the maintenance of strong credit standards.” It would have been just as disappointing as the current recovery was turning out to be. It might have been worse.
In an astonishing makeover of America’s recent economic history Summers proposed that for at least two decades American economic growth had been on weak foundations. To achieve no more than a “normal” rate of growth it had depended on “abnormal” financial bubbles. Looking back over recent decades, Summers asked in a subsequent speech, “[C]an we identify any sustained stretch during which the economy grew satisfactorily with conditions that were financially sustainable? Perhaps one can find some such period, but it is very much the minority, rather than the majority, of the historical experience.”11 It was a remarkable indictment of the policy consensus of which Summers himself had been a defining figure.12 It had dramatic implications for current policy. If America simply waited, the long-awaited rebound from the crisis of 2008 might never arrive.
To address the chronic shortfall in investment, what Summers advocated was a new era of government activism. The United States would not match China, of course. Nor was that appropriate. But the conditions were right for a big burst of public investment. This would rebuild America’s infrastructure, and in so doing it would address the more fundamental questions posed by Detroit. Physical reconstruction would be a means to restore a sense of national coherence and national pride. As Summers remarked on another occasion: “Look at Kennedy airport. It is an embarrassment as an entry point to the leading city in the leading country in the world. The wealthiest, by flying privately, largely escape its depredations. Fixing it would employ substantial numbers of people who work with their hands and provide a significant stimulus to employment and growth. . . . If a moment when the United States can borrow at lower than 3 percent in a currency we print ourselves, and when the unemployment rate for construction workers hovers above 10 percent, is not the right moment to do it, when will that moment come?”13
Belatedly, what Summers was calling for was what Obama’s administration had failed to deliver, a concerted drive to unify American society around a sustained program of investment-driven growth and comprehensive modernization. The efforts at stimulus in 2009 and 2010 had not been negligible. But they had been hedged around by the anxieties of the moment, resistance from Congress, a spectacular and aggressive mobilization of right-wing opinion and Larry Summers’s own nervousness about losing standing with the savvy political operatives. The result was a recovery that was not just slow but deeply inequitable. If the shocking images of dilapidation in Detroit and other postindustrial cities around America were not enough, devastating statistical data completed the picture.
In October 2013 two French
economists, one working in California, the other back in Paris, published the latest release of a long-running project on American inequality.14 Emmanuel Saez and Thomas Piketty were at this point not unknown. An earlier paper in which they mapped top incomes in the United States over the long run had yielded the “We are the 99 percent” slogan that the Occupy movement had used to such good effect.15 Nevertheless, the data they released in October 2013 were astonishing. From the latest round of tax releases they calculated that of the growth generated by the economic recovery since 2009, 95 percent had been monopolized by the top 1 percent. That tiny fraction of the population saw their incomes rebound from the trough of the recession by 31.4 percent.16 Meanwhile, 99 percent of Americans had experienced virtually no gain in income since the crisis. The data were subsequently revised to show a less extreme disproportion.17 But in 2013 the numbers were a sensation. The slow growth in GDP that worried Summers, in fact, hid two radically divergent realities. Whereas a tiny elite were doing extremely well, for average Americans the secular stagnation thesis that Summers advanced as a tentative academic hypothesis was simply the lived reality of the last forty years. Since America’s bicentennial in 1976, productivity growth, which drove overall economic growth, and the returns to labor in the form of household incomes had starkly diverged. The average American shared only to a small degree in national economic growth as measured by GDP statistics. Almost all the benefits of growth were being monopolized by the highest paid and those wealthy enough to own significant portfolios of financial assets. The financial crisis of 2008 had revealed how in extremis national economic policy was subordinated to the needs of a cluster of giant transnational banks. Now, in the face of a dismal recovery, the correspondence between economic growth and the progress of a national society was being challenged from the bottom up. Could the national economy any longer be plausibly presented as a project common to all Americans?