The U.S. Postal System Crisis: Product of Conservative “Reform”

Today, the postal unions representing America’s postal workers is organizing a nationwide “Day of Action” to save the US Postal Service (USPS). National news media have reported extensively on the budget crisis facing the USPS, but has done a typically abysmal job of explaining why the crisis exists. These are the facts…

Republicans, with the support of the Postmaster, are demanding service cuts and layoffs due to the U.S. Postal Service’s (USPS) inability to fund $5.5 billion due on September 30 to its federal retiree health fund. The expected 100,000 layoffs, in addition to exacerbating an already grim unemployment picture in the U.S., will hit African-Americans and veterans particularly hard – two groups that already have much higher unemployment rates than the national average. But apart from the employment issue, we need to be asking why the USPS is in such dire straits in the first place.

The biggest budget problem by far facing the USPS is the mandate placed on it by an outgoing Republican congress in 2006, requiring USPS to pre-fund, over a decade, its employee pensions for 75 years. The USPS is among a handful of employers still offering a defined benefit pension plan that provides real security to retirees after a lifetime of work. The pre-funding requirement, never asked for by the postal unions, was and remains a poison pill for a federally run postal delivery service. No other pension plan, either public or private, is required to pre-fund pension obligations for 75 years into the future in order to be considered solvent. Without this burden, the USPS would be in the black today. The cost of pre-funding has exceeded $20 billion over the past 4 years – an amount that about equals USPS losses for the period.

There are a number of ways to solve the budget crisis in the postal service, but certainly the continued pre-funding required under the 2006 postal reform law should be curtailed. It is unreasonable. But even barring this, there are other options. The Inspector General has determined that USPS overpaid into a number of other funds – between $50 and $120 billion! Those funds could be redirected to the USPS pension fund, allowing it to meet the extreme pre-funding mandate. That, of course, would require commonsense action by a current congress in thrall to Tea Party conservatives bent on decimating government services, including the delivery of mail.

The shuttering of 4,000 mostly rural Post Offices and proposed reduction of service will create real hardship for small-town residents across America. Unlike FedEx and UPS, the USPS has a mandate to serve every American, wherever they live. The private delivery services do not have to deliver to rural regions where it is not profitable, unlike the USPS. In fact, the private companies use the USPS to deliver to some rural areas, because it is cheaper for them to pay the Post Office than to deliver to these areas themselves. Clearly, the private sector will not rush in to provide service when the USPS pulls up stakes in small-town America.

Republican calls for the USPS to “operate like a private business” is undermined by the pre-funding mandate they forced on the agency in 2006, and is unreasonable given the longstanding and laudable USPS mandate to serve all Americans regardless of where they live. Instead of calling for layoffs, reductions in service, and the shuttering of thousands of Post Offices, we ought to be talking about repealing the pre-funding requirement and even subsidizing the Post Office for providing the public good of rural delivery to areas that the private sector find unprofitable to serve.

The current USPS crisis is a wholly manufactured one brought on by conservatives who have wanted to bring down the USPS for decades, allowing private companies to pick up the profitable parts of the service while leaving the rest. We must not let that happen.

Economic Discontent and Conservatives’ Secret Weapon to Win the Class War

Paul Crist

August 13, 2010

Framing the Issue: Class War

The white-hot anger on the “Tea Party” political right and the frustration on the political left largely spring from the same fundamental problem: A generation of increasing economic inequality, job insecurity, loss of privilege, and a once optimistic middle class that is under attack and demoralized. Political and mainstream corporate news media leaders avoid the term, but what we are confronting is class warfare in America. 

The conflict is essentially between the owners of capital, and the owners of labor.  The battle lines are less clear than in the past, but this is not the first time in our national history that we’ve been here.  In the late 19^th and early 20^th century, there was only a small middle class relative to the population.  The period from 1940 to the 1960’s saw a tremendous growth of a middle class that, while their principal asset remains labor, also holds some capital assets (home equity, stock ownership, and retirement funds) that they fiercely desire to protect.  That has helped society’s true economic elites to enlist a substantial subset of the middle class to espouse a capitalist ideology that is largely in opposition to their real economic interests. 

Asset price bubbles during the past several decades helped to strengthen the ideology of wealth acquisition through capital ownership among middle and working classes, but the bursting of the housing price bubble and consequent financial crisis has been a major blow to the middle class psyche.  The current crisis has brought longstanding economic anxieties to a boil, and is largely behind the intense fear, anger, and frustration we are now experiencing as a society.  

Conservative middle class voters have long voted based on their aspirations, rather than their reality.  They have internalized an ideology that wealth and financial success equates to being “good people.” Like most of the working and middle class, those on the right aspire to the “American dream.”  But for conservatives, the wealthy “deserve” what they have, because they have worked hard, overcome obstacles, and demonstrate independence and self-reliance. Of course, they see those qualities in themselves and so have an ingrained expectation of achieving the wealth and success that they are “entitled to” as “good people.”

These myths about wealth, success, and the American dream are woven into the fabric of American culture and taught to successive generations. In this worldview, taxes “unjustly” take away wealth legitimately and “independently” earned, to give to the society’s “undeserving” and dependent.  Government regulation is an unreasonable obstacle to an individual’s “right” to acquire wealth and achieve the American dream.  There are myriad fallacies inherent in these American myths, of course.  Not least, the notion that wealth is acquired “independently” is absurd on its face.  Without the social order imposed by government, without the security, national infrastructure, education, and public health supported by government, acquisition of wealth would be impossible. Increasingly limited government hindered by successive rounds of tax cutting leads to an inability to maintain the building blocks of a social order where wealth can be created. 

A conservative economic philosophy that demands ever lower taxes and ever smaller, less potent government, focused narrowly on national security, the administration of justice (essentially punishment), and promotion of the “unfettered” conduct of business makes it much less likely that Tea Party conservatives will achieve the wealth and self reliance to which they aspire.

There is incontrovertible evidence that it was the strength of government that created the middle class between 1940 and 1960.  It was during this period that the middle class expanded rapidly, thanks to the introduction of a social safety net, and government regulation of business practices, and protections for workers, the environment, and consumers.  It was during this period that educational opportunity expanded; progress was made on civil liberties and equal treatment; public service was considered to be honorable and a privilege.  Government support for workers’ right to organize and bargain collectively with the owners of capital significantly promoted an economy that benefited a large proportion of the population.  In other words, the middle class was built thanks to traditional progressive values dominating American politics and policy.  And it is government’s growing impotence that has allowed the middle class, the bedrock of American prosperity, to be nearly destroyed in recent decades. 

Tea Party conservatives believe they are overtaxed, because they’ve been told they are by economic elites. But the US government budget, at 15% of GDP, is lower than it has been since the early 1940’s, at the beginning of the period when the middle class was created.  The government budget as a percent of GDP is the lowest of any wealthy country.  While we could debate the fairness of the tax system, whether it ought to be more or less progressive, etc., the gross numbers hardly indicate an overtaxed American populace.

The right thinks government is corrupt and does nothing well.  In fact, it is corrupt. But it is corrupt because we’ve allowed the owners of capital, conservative corporate interests, to have an outsize influence.  Those interests are not aligned with the interests of middle class workers whose principal asset is their labor. Government doesn’t do a lot of things well because we’ve gutted it, privatized it, and turned it over to particular interests over the last three decades.  Agency and regulatory budgets have been steadily slashed; and functions that ought not to be subject to the profit-making motive (e.g., environmental protection and regulatory oversight, worker protection oversight, even national defense and security) have been shifted to profit-focused private contractors.  The effect of outsize influence for the owners of capital has skewed US trade and industrial policies in ways that have devastated working families who grew up believing in the American dream.

That dream can be revived, but until we reverse the course of the past thirty years, it will not be.  Unfortunately, the right remains wedded to the ideology of supply-side, capital-dominated economics that is essentially the same as that which prevailed just prior to the Great Depression.  To change that allegiance, the left must make some fundamental changes in the way we communicate our ideas, beliefs, and strategies.

The Secret Weapon of Conservatives: How ordinary working Americans become devoted to an ideology that is opposed to their own economic interests.

The owners of capital have done a remarkable job of framing their messages in such a way that they are perceived as “ordinary people,” when in fact, they are anything but.  They used language brilliantly to frame the debate, taking advantage of widespread discontent following the Vietnam War and the economic stagnation of the 1970’s.  The left, conversely, has done a very poor job of framing the debate and developing winning language and messaging based on conceptual mental frameworks.

There are many examples.  George Lakoff, a linguistics professor at UC Berkeley, uses the example of the word “revolt” which implies or assumes a population that is being ruled unfairly. The word “revolt” creates mental images of people throwing off that unfair rule, which is perceived as a good thing.  

We hear the term “revolt” paired with “voter,” and ordinary Americans, who identify as “voters” see themselves as the oppressed people and the government as the oppressor.  If the voters revolt against government, then, everything will be good again.  This is the language that is behind the anti-incumbency mood in the current election cycle. If we “throw all the bums out,” and elect new leaders who are “not Washington insiders,” then things will get better.  Of course, it simply never turns out that way, and so every election, we hear new calls to again “throw the bums out.”

But what has the right done differently from the left?  Why have they done such a superior job of framing the political discourse?  In a word, the answer is money.  The right, the owners of capital, has invested billions of dollars researching language and idea messaging.  They have established conservative think tanks, and encouraged wealthy individuals to set up professorships.  They have invested in media outlets dedicated to disseminating conservative ideas.  Today there is an overwhelmingly conservative message dominating talk radio, cable news, print publications, and online information sources.

The investments of economic conservatives have created an “army of the right” that is constantly updating and honing the messages, reinforcing the conceptual frameworks, and ensuring that conservative ideas dominate the national political discourse, crowding out opposing ideas that are less well articulated.  As businessmen, the right understands the long-term value of investing and they have done an outstanding job of building the infrastructure necessary to preserve and defend their interests.

The left has a very different conceptual view of human nature and the human condition.  The left gives money to grassroots organizations and demand that it all go “to the cause.”  Those causes are about helping people in need, nurturing, and taking responsibility for others.  Money spent on administration, communications infrastructure, and career development for progressive leaders is a diversion of money that is intended to “help.”  This is a fundamentally different worldview from that of the right, who see “good” people as those who have already become wealthy, or at least self reliant.  The conservative worldview says that “helping” spoils people, gives them things they have not earned, and keeps them undisciplined and dependent.  This difference explains why conservatives have done better at dominating our political discourse and direction.

When one projects these divergent worldviews onto the nation, it is easy to see that taxes “take away” resources that have been earned by “good, disciplined, self reliant” people and give those resources to the “undisciplined and dependent” people who have not earned it.  Tax “relief” is how the right frames the debate about taxes, implying that taxes are an affliction that must be overcome.  To oppose tax “relief,” therefore, is to be the villain. To escape the demonization inherent in opposing well-articulated right-wing taxation and governance policies, Democrats have been forced to adopt the language of the right.  Because they are perceived as grudging followers of those policies, they have failed to avoid being called the villains.

In order to move the debate in ways that benefit workers, the owners of labor in our economy, we need to find a fundamentally different linguistic framework to talk about taxes and the role of government.  We need language that defines taxes as the price of being an American.  Taxes paid by previous generations are what made possible the infrastructure on which we rely now…the highways, the education system, the electric power grid, and the justice system…all of it.  Tea Party conservatives seem to view themselves as self reliant, but they are failing to recognize the enormous public and social infrastructure on which they rely and that makes their way of life possible.  We need to convince ordinary working Americans on the right that the infrastructure on which they depend must be maintained and enhanced in order for our way of life to be sustained or improved.

In fact, by not paying the taxes needed to maintain our national infrastructure, by not paying the dues for being an American, we are borrowing from the past and robbing from the future of our country.  Paying taxes should become an issue of patriotism, but instead, those who oppose taxes are now able to portray taxation as somehow unpatriotic.

Reframing the public discourse is a long-term project.  The right began investing in the infrastructure needed to frame public debate in the 1970’s.  By 1980, they had Ronald Reagan, who was able to use the infrastructure the right had developed and win the presidency.  The left needs to begin to invest in the same sorts of infrastructure that the right has been building for decades.  That won’t be an easy transition, based on the worldview of the left, but it must be done.

Progressives need to focus on identity and ideas, and move away from marketing issues and policies they think will resonate with voters. And above all, they need to learn how to talk about identity and ideas in ways that ordinary Americans can understand.  It seems that when Democrats do talk about ideas and identity, they open themselves up to charges of elitism, East- and West-Coast intellectualism that is removed from the realities of working Americans.  That represents a failure of conceptual framing of our public discussion.  We live in a sound bite era, and Progressives have yet to figure out how to talk about ideas and identity in sound bites.  The right does this very well.  And that is why they win at the ballot box.

U.S. Trade Policy and Declining Manufacturing: Where do we go from here?

The U.S. economy and the manufacturing sector in particular, face both short-term and long-term challenges.  There is debate about whether government can or should play a role in addressing those challenges, and if so, what are the fiscal, industrial, regulatory, and trade policies that would benefit the stakeholders, which essentially include all U.S. citizens in one way or another.

I should acknowledge at the outset a bias toward thoughtfully considered government interventions to guide the economy and trade in ways that benefit American workers and allow them to participate in the gains that accrue from their labor.  There are economic reasons for my bias that have nothing to do with either socialist or altruistic impulse.  That bias in no way means that I favor protectionism or a retreat from global trade, or that government intervention in the economy is always desirable, but there are, I believe, issues and stakeholders that get too little consideration and solutions to structural economic problems that are given short shrift in the name of conservative ideological orthodoxy.

There is ample evidence that without adequate and well-designed regulatory intervention in domestic and global markets, capital and political power tends to migrate upward and become concentrated at the top of the economic ladder. We see that phenomenon in country after country, most recently in the U.S.  Concentrated wealth becomes problematic when it undermines social cohesion and a sense of shared purpose. 

The wealth/income gap is at the core of social and political stress and instability in most developing countries, and the U.S. is now experiencing the pangs of disequilibrium once confined to so-called “poor” countries. 

As inequality increases, it can begin to undermine demand for goods and services.  The wealthy may consume a great deal, but there are simply not enough of them to maintain aggregate domestic or global demand.  Further, at the extreme, even those at the top may suffer negative economic effects if insufficient demand results in their capital being inefficiently allocated to producing goods and services, assuming international markets are not soaking up domestic demand shortfalls. 

Despite what conventional trade and economic theories suggest, there are benefits to large countries in maintaining a diverse economic base that includes a broad manufacturing sector.  Not everyone in a large country is suited to higher education and high-skill employment.  The alternatives for non-college-educated workers ought to go beyond low-paid service sector jobs.  Comparative advantage theory may be great on paper, but societies have more complex goals that trade theory alone cannot address. 

Comparative advantage may also have lost some of its relevance in a highly globalized world where the factors of production, labor, capital, goods, services, and information can cross national borders quickly and easily.

There are always losers and winners when countries move toward free trade. That part of the theory seems enduring.  But decades of evidence worldwide make clear that the political will to compensate the losers rarely if ever exists, despite the fact that the gains to the winners are more than adequate to do so. Most economists acknowledge that trade has played a significant role in the increasing income inequality which has characterized the past two decades in the U.S. 

Increasing “financialization,” (see Note 1.) accompanied by declining industrial output in large, mature empire economies has also, I believe, played a historical role in their decline.

So there are political and economic factors that support arguments for thoughtful trade management and interventions, in order to preserve economic sustainability, diversity, and an efficient distribution of income and wealth that enhances a well-functioning capitalist system.

Finally, my firm opinion is that global trade, as practiced today, inadequately accounts for the power of large, multinational corporations whose allegiance is to shareholders (the owners of capital) regardless of where the headquarters office is domiciled.  U.S. trade in particular is characterized by labor and environmental arbitrage by U.S.-based multinationals with no real national allegiance.  Political leaders who routinely support globalization without questioning the motives of multinational players are either corrupted by their influence, or insufficiently versed in the current realities of international trade flows between the U.S. and its major trading partners.

On the question of government intervention in the economy, I take issue with so-called “free market conservatives” (see note 2) who oppose what they see as government meddling in private sector investment, production, and decision making. “Free market” and small government ideology has dominated American policy for a generation.  The resulted has been a broad retreat from worker and environmental protections and benefits; an enormous increase in the income gap; disastrous consequences in the financial sector that plunged the world into the worst economic recession since the 1930’s; and a less diverse and more fragile economy than we had in the postwar era.

Domestic industrial production and employment has continued a long decline, even as industrial sector deregulation accelerated and unionization plummeted. Deregulation and lax oversight of the financial sector contributed to financialization of the U.S. economy in recent years. The development and trade in complex financial instruments helped the financial sector grow substantially as a percentage of GDP. (see note 3)  And in due course, the casino mentality on Wall Street, combined with monetary and housing sector policies that were furiously trying to prop up consumer spending as wage growth stagnated, resulted in the current deep economic downturn.

There is an inadequate sense of urgency to seek equitable solutions to the structural problems confronting the U.S. economy.  The gutting and outsourcing of regulatory oversight in many U.S. economic sectors led to environmental degradation and worker exploitation (both of which have long-term costs not apparent on annual corporate balance sheets).  A broken immigration policy has served the economic interests of politically influential business sectors while sewing social, economic, and cultural divisions. Tax, monetary, and trade policies have favored the richest and most politically powerful Americans, exacerbating the growing income and wealth gaps while putting middle class workers under increasing pressure (and this has in turn put more price pressure on multinational firms, forcing them to be peripatetic searchers of ever-cheaper labor, and further exacerbated already large trade imbalances).  Political posturing on all these issues must give way to unified, strong leadership. 

Given this extensive list of complex economic and trade issues, what are the policy prescriptions that might best revitalize American capitalism?  All of these issues are deeply interrelated, and it would take a book to adequately deal with all of the important questions.  But it is possible to identify a few specific areas where change could have profound and lasting positive effects.

U.S. Trade Policies Have Failed American Workers and Led to Structural Imbalances in the Economy

Trade policy and trade agreements are rightly a prime target for criticism: manufacturing competition from low-wage, low-regulation countries is unfair to U.S. workers, exploitive of foreign workers and labor migrants, and injurious to the global and local environment. 

Solutions to reviving the U.S. economy in ways that benefit working Americans and stimulate environmentally benign industrial production involve more than trade policy, but trade policy has played a central role in creating the problems we now face, and a refocusing of  trade policies can also play a central role in renewal.

Growing trade deficits since the 1980’s have been associated with declining real wages, especially for non-college educated Americans that make up nearly 2/3 of the workforce. Manufacturing sector workers have been shifting to lower-wage service sector jobs, in retail, healthcare, and other low-skilled services as manufacturing jobs migrated overseas. 

To keep consumer demand buoyant as wages stagnated, ever greater downward pressure was put on prices, driving demands from U.S. multinationals for new bilateral and multilateral agreements that opened investment and trade access to low wage, low production cost countries.  Initially, production offshoring was confined to low-skill, low technology sectors, but over time, more technology intensive manufacturing has followed the march overseas.  

Of the top eight trade deficit industries, the second largest deficit after oil & natural gas is in motor vehicles and parts, which is not a low-technology industry by most measures. There are also large deficits in computers, office machines and parts; in steel and alloys; and in televisions and other electronic equipment.  Only three of the top eight trade deficit industries (apparel, leather goods, and toys) are in categories usually considered by economists to be low-technology. 

Meanwhile, the total surpluses produced in our top eight net surplus industries have on average amounted to less than half of the deficits of the top eight net deficit industries in recent years.  And while most of our top eight surplus industries involve high technology production, three are in the (sometimes subsidized) commodity sector: agricultural grains, meat packing products, and cigarettes.  These sectors do not generate many high-wage jobs.

In several of the net surplus industries that do involve high technology and high wage production (aircraft, chemicals, construction machinery, scientific instruments, and engines and turbines) there has not been sustained growth since the late 1990’s. Further, the U.S. is also an importer in all of the high technology industries where we manage to maintain a surplus.  Other countries are rapidly expanding their capabilities in these sectors.  How long will the U.S. maintain surpluses even in high technology production without fundamental changes in policy?

The scale up in foreign countries of auto, aerospace, energy, biotechnology, and other high technology industries provide evidence of longer-term workforce benefits to maintaining low and medium-skilled manufacturing jobs.  At least some of those workers will, over time, acquire the skill and training required for higher-skilled manufacturing jobs and engineering innovation. 

Highly productive human capital is the result of many things, including an effective education system, good public health, and continuing skills development…the benefits usually associated with economic development. Thus, it may be no coincidence that even U.S. manufacturers in high technology sectors are increasingly relying on imported labor to meet U.S. based manufacturing workforce needs.  After all, we’ve been exporting the low and medium skilled jobs that are the training ground required to meet the workforce demands of our own high technology sectors.  And immigrant workers, even highly skilled, are often willing to work for lower wages in return for U.S. employment.

Globalization has accomplished the goal of lower consumer prices, but the long-term economic consequences of cheap imports and stagnant domestic wages in an increasingly service-oriented economy has begun to become clear.  When wages eventually fail to sufficiently support domestic consumption, even in the face of cheaper prices, economic contraction is inevitable. Consumers can only use the equity in their homes as an ATM for so long.  And if exchange rates and trade agreements hamper exports, the contraction in consumption coupled with trade deficits present a complex dilemma for policymakers. 

To be sure, America has enjoyed substantial aggregate gains from growing trade.  Overall, U.S. GDP growth has been moderate to strong right through mid 2008.  And it may yet resume post recession.  But the benefits of that growth have not been shared with American workers, and the current downturn has exposed deep structural challenges to our economy. 

The time has come to re-think our approach to global trade and the economy on many levels.  In some cases, renegotiation of key portions of existing agreements is called for.  Fortunately, growing political pressure for change is limiting further expansion of trade policies that have cost an estimated 1 million manufacturing jobs during the past decade.  There is an emerging consensus that the U.S. needs to take definitive steps to rebuild a domestic manufacturing base, to address the problem of wage disparities, and to take steps to level the global trade playing field.

Exchange Rates, Trade Barriers, and the Dollar as Global Reserve Currency

Exacerbating the challenges resulting from U.S. trade policies of the past several decades are complex trade barriers, export-led growth policies among key U.S. trading partners, and a global currency architecture that is unfavorable to U.S. exports. 

There is little argument among economists that China manages renminbi exchange rates to promote exports and limit imports.  But exchange rate controls are just one of many forms of non-tariff barriers to imports and export-led growth policies pursued by China.  With China trade accounting for about three-quarters of the total U.S. non-oil goods trade deficit, China should be the primary focus for U.S. efforts to right trade imbalances.  But progress will not be easy.

The Chinese government announced recently that it would allow its currency to fluctuate slightly, but there is no concrete evidence of progress.  Between the June announcement and August 2010, the currency only appreciated by about 1 percent. Despite lack of progress, the U.S. Treasury Department declined to designate China as a currency manipulator.  With the renminbi undervalued by as much as 40% according to some analysts, U.S. manufacturers and workers are paying a steep price for Chinese intransigence on this issue.

A number of bills to deal with Chinese currency manipulation are pending in congress, in the absence of firm action from the Obama administration.  These include the Currency Exchange Rate Oversight Reform Act of 2010 in the Senate (18 cosponsors); and the Currency Reform for Fair Trade Act in the House (133 cosponsors).  Both bills are in committee, with passage still uncertain.  Many Members consider trade issues to be under the purview of the Executive, with Senate ratification of trade agreements.  But several trade deals remain pending in the Senate, owing to growing anxiety over many trade issues including Chinese currency manipulation.

The large portfolio of U.S. government securities held by China complicate the relationship, but for the foreseeable future, China will rely on access to U.S. markets as much (and perhaps more) as the U.S. relies on China to buy U.S. debt.  The relationship is not as asymmetrical as some fear.  Chinese leaders have their own challenges with development, and rely on high rates of economic growth to maintain political support.

Chinese government control over economic resources and activities, particularly in the banking sector, have also helped China to pursue and export-led growth strategy.  Where a banking system is controlled or heavily directed by the state, national savings can be assembled and funneled into development and infrastructure that either directly or indirectly supports an export led national policy. 

China is not the first country to pursue growth using government control over banking and financial decision making.  Germany pioneered the model in the late 19^th century, and many of the East Asian countries have done the same thing in the 20^th century. Over time, these other countries decided they needed to move beyond that model in order to promote economic diversification, and China may yet follow that same path over time.  But for now, government control is an important driver of China’s export led growth policy.

Related to, but quite different from, government control and decision-making is the issue of trade barriers driven by private sector exclusionary policies toward imports.  Japan has its Keiretsu and South Korea has Chaebol.  Both are systems of interwoven banking, business, and management relationships within different companies or subsidiaries.  These are closed systems that favor transactions within and between members, keeping outsiders out even when outside players are competitive.  Chinese private-sector business practices and trade policies, in many ways, are modeled on those of Japan and South Korea.  But at its most extreme, the U.S.-Japan trade imbalance never exceeded a three-to-one ratio.  U.S. imports from China exceed exports by five times.

The Chinese government has also been remarkably good at using pilot projects to speed development, and this, too has benefited its export industries.  China is able to try laws and policies out in one city or to invest in an innovative manufacturing process in one place, and then pick what works for promotion elsewhere (often called “picking winners”).  Few other political systems work in that way, but in China it is very easy to do.  It has led to uneven development across China, but has allowed for rapid development and scale up from low and medium skill manufacturing to now competing globally in higher-technology sectors. (see note 4.)

China is not alone in its effective protectionism and use of non-tariff barriers to U.S. exports.  Subsidizing domestic producers, minimum import pricing, advertising restrictions, import licensing requirements, rebates of domestic taxes to exporters, and many other barriers are added to the more obvious trade barriers engaged in by many countries.  But China is the leader in promoting exports and blocking imports, especially in its trade relations with the U.S. 

Returning to the general theme of currency valuations on trade competitiveness, the effects of a global currency architecture that keeps the dollar overvalued cannot be overestimated.  As long as the U.S. dollar remains the global reserve currency, strong demand for dollars will keep the value at a level that makes U.S. exports uncompetitive on global markets.  By most measures, the dollar is now at least 10% overvalued.

There are a number of potential ways to address exchange rates that negatively affect U.S. manufacturing (both over-valuation of the dollar and volatility). One option would be an orderly shift toward a new reserve currency system based on the IMF’s special drawing rights (SDRs).  SDRs are denominated in dollars, but the nominal value is based on a basket of major currencies, including Japanese yen, U.S. dollars, Euros, and British pounds.  The concept could be expanded to include other currencies, not least the Chinese renminbi.  The shift, implemented over time and in coordination with international partners, would be a positive long-term solution to excess global demand for U.S. dollars. 

Such a shift would necessarily be measured and not without challenges.  At present, SDRs make up only about 4%of global reserves, and to become the principal reserve asset, the supply would have to grow tremendously, to about $3 trillion.  The IMF would have to take on the characteristics of a world central bank, which is sure to be controversial, especially in the U.S., which has veto power over SDR issuances, and will not be anxious to relinquish the prestige associated with the dollar as reserve currency.

Another option would be for the U.S. to adopt a more coordinated approach to exchange rate policy involving target zones, but retaliation by trading partners, intent on maintaining exchange rate advantage over the dollar might result in uncontrolled growth of money supply in multiple countries, kicking off an unacceptable period of high global inflation. 

A tax on all cross-border currency flows would help dampen speculative currency movements, and could have the additional advantage of raising much-needed funds for global health and development initiatives. Such a tax would not be precluded by a move to an SDR-type reserve currency.

Fundamentally, the time has come to ask if there is a net benefit to the U.S. of having the dollar as the global reserve currency.  We have to consider whether there are longer-term benefits to rebuilding a domestic manufacturing/industrial base and creating job growth in low- and mid-skill economic sectors that is being impeded by an overvalued dollar.

The McKinsey Global Institute (MGI) recently released a study examining the costs and benefits to the U.S. economy of the dollar as reserve currency.  They found that the net financial benefit was between $40 billion and $70 billion—or 0.3% to 0.5% of U.S. GDP. In the first half of 2009, the dollar appreciated by about 10% due to its safe-haven role, and the cost-benefit became less positive to mildly negative.  The estimated range was between a net benefit of $25 billion and a net cost of $5 billion.

The as the global reserve currency, U.S. is able to raise capital more cheaply owing to large purchases of U.S. Treasury securities by foreign governments and government agencies. Those purchases have reduced the U.S. borrowing rate over the past few years and are worth about $90 billion to the U.S. But without a yawning trade deficit, and with re-development of a vibrant manufacturing sector, it is likely that U.S. international borrowing needs could be reduced by more than the estimated net financial benefit.

So long as the dollar remains the reserve currency, it will be a magnet for official reserves and for global liquid assets, keeping it overvalued by between 5% and 10% according to MGI researchers.  And that means that U.S. exports cost more on world markets while imports are too cheap in U.S. domestic markets. That has a short-term benefit for consumers, but represents a long term detriment for U.S.-based manufacturing, and for the U.S. fiscal position.

U.S. policymakers therefore need to ask, “Is it more important to the U.S. economy, and to U.S. manufacturers and workers, to be able to borrow cheaply, or to compete on world markets and create jobs?”  MGI estimates that exporters and manufacturers are losing about $100 billion per year, and that employment in these sectors is reduced by nearly a million jobs.

The Europeans seem to recognize the long-term downside of their currency becoming an alternative or secondary reserve currency. In a November 2009 interview with Le Monde, European Central Bank president Jean-Claude Trichet said that the euro was “not designed to be a global reserve currency.” 

Some economists see the renminbi as eventually supplanting the dollar as the global reserve currency, but that is unlikely to happen for many years, perhaps not before 2050.  The renminbi is now plays only a minor role in international exchange, owing to liquidity and convertibility issues. If it were to play a larger role, it would appreciate, undercutting China’s export-led growth policy.

If the world’s two main reserve currency issuers increasingly see little national economic benefit to continuing that role, the time has come for a global summit to find an innovative solution such as adoption of SDR as a reserve currency.  Failure to do so will result in a period in which an unmanageable global financial system is characterized by volatility and speculative capital flows. Such a period would be extremely difficult for businesses and national economies, with exchange rates frequently out of line with economic fundamentals.  American workers will likely bear the brunt of global currency instability as credit becomes increasingly dear and business activity further contracts.

Policy Prescriptions to Rebalance Global Trade

Trade deficits, gains from trade, and exchange rate fluctuations only matter insofar as they affect real people, positively or negatively. U.S. workers have paid a steep price for U.S. globalization policies, while multinational businesses have been big winners.  Thus, new approaches should be based on an analysis of how past and current approaches have failed U.S. workers.  The outsize influence of business interests in trade policymaking bears significant responsibility. It is no coincidence that the Dow Jones Industrial Average of stock prices for the largest U.S. firms soared from the mid 1980’s to 2000, as global trade flows dramatically increased.  Even since 2000, and despite high volatility and the financial crisis that began in late 2008, stock prices have held up remarkably well and corporate profits in 2010 are at record levels while wages remain depressed and unemployment is unacceptably high.  U.S. multinational corporations have clearly prospered under the current global trade regime.

U.S. trade policymaking has long been dominated by a powerful center-right coalition of corporate business interests.  Republican business conservatives, supported by center-right Democrats have ensured that investor rights have received top priority, while workers, consumers protections, and the environment have been largely ignored. Through trade agreements like NAFTA, and WTO rulemaking, U.S. firms have been provided tremendous support for outsourcing labor abroad.

Just one example of how this has played out for U.S. manufacturers: Mexico now exports more vehicles (a high-technology sector) to the U.S. than the U.S. exports to the rest of the world.  The number one Mexican exporter of vehicles is a U.S. firm: Chrysler.  US multinationals initially used foreign plants to serve foreign markets, but over time, that has changed.  Now those foreign plants largely serve the US market.  U.S. firms export intermediary goods for assembly abroad, and re-import value-added finished goods in a purely labor arbitrage arrangement.

Trade agreements have promoted multinational business interests in many ways, including through limits on trade related investment measures, (see note 5) intellectual property rights enforcement with binding dispute settlement mechanisms, and by bringing services trade into the WTO.

These and other business-favored trade rules have fostered tremendous growth in foreign investment that has accelerated the impact of trade on workers throughout the developed and developing worlds.

Globalization has also allowed U.S. multinationals to escape regulatory systems that were implemented after the 1930’s.  Those systems brought stability, environmental protections, and broadly shared prosperity in the U.S. and to a lesser extent globally.  As globalization has proceeded, economic competition has become a race to the bottom in environmental protection, wages and labor standards, and consumer protections.

The time has come to build a new coalition for trade management that is center-left…giving more attention to workers, the environment, and consumers. Trade management and international trade agreements must focus on the following:

• Priority must be given to a global trade environment that fosters a high and rising standard of living for all Americans, and for working people around the world. A domestic manufacturing base is an essential component of a diverse economy that achieves broadly shared high living standards. This is true for all countries, but the U.S., after decades of manufacturing-sector decline, should make this the top priority.
• Domestic tax policies and a domestic industrial policy aimed at manufacturing jobs creation must be a part of this new approach. Most national governments intervene to affect the structure of national economies and affect outcomes.  The U.S. has a long professed opposition to market interventions by government, but in fact, U.S. policies intervene in many ways, often benefitting the interests of influential multinational businesses.  Active and coherent intervention, with input from management, labor, political leaders, and others, should be brought to bear in the promotion of specific industries in which high-wage jobs can be fostered and where the U.S. can compete internationally on a more level playing field.  Attention should also be given to easing the challenges faced by workers, firms, and communities affected by structural economic change.
•  Chronic U.S. trade deficits must be addressed, particularly deficits related to trade with China, Japan, Mexico, and Europe.  Trade deficits are the effect of policies that have encouraged the offshoring of U.S. manufacturing and negatively affected U.S. workers.  The structural causes of these deficits vary among trading partners, and the solutions will vary somewhat in each case. 
  • The deficit with Europe is mostly a factor of slow growth on the continent that will have to be dealt with mainly by European leaders.
  • The problems with China and Japan are more complex, and involve exchange rate manipulation (addressed earlier… consideration should be given to adoption of a new global currency reserve regime based on the IMF SDR model); and systematic discrimination against U.S. imports (negotiations should work to remove non-tariff barriers, using a carrot and stick approach).
  • The deficit with Mexico stems from wage and consumer demand differentials, and proximity to the U.S. market.  A regional “Marshall Plan” to assist economic development in Mexico and the Western Hemisphere is long overdue. Economic development and poverty reduction in Latin America would address the twin problems of resistance to labor and environmental standards, and over-reliance on U.S. consumers as the market of first and last resort. (see note 6.) 
• The U.S., in coordination with other advanced economies, must gradually reduce the value of the dollar. As noted earlier, the surest, most sustainable way to do this is to gradually replace the dollar as the world’s reserve currency.
• Advanced economies must develop new incentives for developing countries to raise labor and environmental standards, and to adopt alternatives to export-led growth.  Too many countries are competing for access to the only open market in the world, and the U.S. can no longer afford to be the market of first and last resort.

For the global marketplace to benefit the broadest possible number of stakeholders, cooperation and coordination among global policymakers, business, and workers is essential.  The genie is out of the bottle, so to speak, and retreat from globalization is neither an option nor desirable.  The market has outgrown the bounds of the domestic regulatory state in important ways.  Issues that are causing significant frictions, imbalances, and inequities must be resolved soon, and the way forward must be based on inclusion and broad participation in decision making, implementation, and benefits. 

NOTES:

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1.  Financialization can be defined as an economy that increasingly depends on financial transactions to support GDP growth, while manufacturing and industry moves to low-cost overseas markets.  The British Empire in the second half of the 19^th century is a prime example.  London became increasingly a financial and trading center, while manufacturing moved increasingly to the British colonies.  By the early 20^th century, the empire was substantially weakened.

2.  A misnomer, since our economy is by no means free and unfettered, but is in fact skewed to support the owners of capital in subtle and profound ways.

3.  Financial sector profits accounted for 25% of all corporate profits, even in the recession year of 2009. In 2008, finance, insurance, real estate, rental, and leasing accounted for 21% of the entire private economy. Some would argue that these percentages are too high for an economic sector that “doesn’t really make anything except money.”  That may be an unfair mischaracterization of the financial sector, but it bears considering what percentage of the economy we think ought to be centered on finance and financial services.

4.  “Picking winners” has long been opposed by U.S. political leaders, who believe that the market can better allocate resources to the most competitive technology innovations, but there is evidence that in capital-intensive, high technology industries, it can lead to long-term economic benefits.  The European aerospace consortium that builds Airbus commercial airliners grew from a conscious decision to enter the market and subsidize the industry until it became profitable.

5.  The measures adopted by governments to attract and regulate foreign investment, including fiscal incentives, tax rebates and the provision of land and other services on preferential terms. In addition, governments impose conditions to encourage or compel the use of investment according to certain national priorities. Local content requirements, which require the investor to undertake to utilize a certain amount of local inputs in production, are an example of such conditions. Export performance requirements are another example; they compel the investor to undertake to export a certain proportion of its output. Such conditions, which can have adverse effects on trade, are known as trade-related investment measures or TRIMs.

6.  Such a plan would involve development aid targeting key institutional capacity building, debt relief where called for, and would require meeting benchmarks in key social standards. Japan and China could do the same in Asia, and Africa would need broad, multilateral assistance. A U.S.-led hemispheric “Marshall Plan” would foster regional integration, stimulating demand for high-wage, high-skilled exports from North America, which can be used to help the rest of the hemisphere grow develop more rapidly.  U.S. policy must foster global growth, because slow global growth will pull imports to the U.S. while reducing demand for U.S. exports.

Linguistic Frameworks of the Right: Key to US Economic Decline

Paul Crist, August 13, 2010

The anger on the Tea Party right, and the frustration on the left, mostly emanate from the same economic phenomena.  The difference is that those on the right have been coopted to a set of beliefs that are actually in opposition to their own economic interests.  They vote their aspirations, rather than their reality.  But the ideas they support actually make it ever less likely that they will achieve the wealth and self reliance to which they aspire.

The right demands lower taxes and ever smaller, ever more impotent government, focused only on national security, administration of justice (essentially punishment), and promotion of the orderly but “unfettered” conduct of business.  There is, of course, the social conservative right, but there is evidence that that movement is beginning to lose steam, at least while the country is in the throes of a deep economic downturn.  So the focus here is on the phenomenon of economic conservatives, many aligned with the Tea Party movement, who are currently dominating our national political discourse.

There is incontrovertible evidence that it was the strength of government that created the middle class between 1940 and 1960.  It was during this period that the middle class expanded rapidly, thanks to the introduction of a social safety net and government regulation; expansion of educational opportunity; civil liberties and progress toward equal treatment; public service; and promotion of an economy that benefits a large proportion of the population.  In other words, the middle class was built thanks to traditional progressive values dominating American politics and policy.

And it is government’s growing impotence that has allowed the middle class, the bedrock of American prosperity, to be nearly destroyed in the last few decades.  The right believe they are overtaxed (because they’ve been told repeatedly that they are), but the US government budget, at 15% of GDP, is lower than it has been since the early 1940’s, at the beginning of the period when the middle class was created. And the government budget is also now the lowest of any wealthy country.  While we could debate the fairness of the tax system, whether it ought to be more or less progressive, etc., the gross numbers hardly indicate an overtaxed American populace.

The right thinks government is corrupt and does nothing well.  In fact, it is corrupt. But it is corrupt because we’ve allowed the owners of capital, conservative corporate interests, to have an outsize influence.  Those interests are not aligned with the interests of middle class workers whose principal asset is their labor. And government doesn’t do a lot of things well because we’ve gutted it, privatized it, and turned it over to particular interests over the last three decades.  Agency and regulatory budgets have been steadily slashed; and functions that ought not to be subject to the profit-making motive (e.g., environmental protection and regulatory oversight, worker protection oversight, even national defense and security) have been shifted to profit-focused private contractors.  The effect of outsize influence for the owners of capital has skewed US trade and industrial policies in ways that have devastated working families who grew up believing in the American dream.

That dream can be revived, but until we reverse the course of the past thirty years, it will not be.  Unfortunately, the right remains wedded to the ideology of supply-side, capital-dominated economics that is essentially the same as that which prevailed just prior to the Great Depression.  To change that allegiance, the left must make some fundamental changes in the way we communicate our ideas, beliefs, and strategies.

How did ordinary working Americans become so devoted to an ideology that is opposed to their own economic interests as the owners of labor? 

The owners of capital have done a remarkable job of framing their messages in such a way that they are perceived as “the people,” when in fact, they are anything but.  They used language brilliantly to frame the debate, taking advantage of widespread discontent following the Vietnam War and the economic stagnation of the 1970’s.  The left, conversely, has done a poor job of framing the debate and developing winning language and messaging based on conceptual frameworks.

There are many examples.  George Lakoff , a linguistics professor at UC Berkeley, uses the example of the word “revolt” which implies a population that is being ruled unfairly, or assumes that they are being ruled unfairly. And it creates mental images of people throwing off that unfair rule.  The idea of throwing off unfair rule is perceived as a good thing. 

We hear the term “revolt” paired with “voter,” and ordinary Americans, who identify as “voters” see themselves as the oppressed people, and the government as the oppressor.  If the voters revolt against government, then, everything will be good again.  This is the language that is behind the anti-incumbency mood in the current election cycle. If we “throw all the bums out,” and elect new leaders who are “not Washington insiders,” then things will get better.  Of course, it simply never turns out that way, and so every election, we hear new calls to again “throw the bums out.”

But what has the right done differently from the left?  Why have they done such a superior job of framing the political discourse?  In a word, the answer is money.  The right, the owners of capital, has invested billions of dollars researching language and idea messaging.  They have established conservative think tanks, and encouraged wealthy individuals to set up professorships.  They have invested in media outlets dedicated to disseminating conservative ideas.  Today there is an overwhelmingly conservative message dominating talk radio, cable news, print publications, and online information sources.

The investments of economic conservatives have created an “army of the right” that is constantly updating and honing the messages, reinforcing the conceptual frameworks, and ensuring that conservative ideas dominate the national political discourse, crowding out opposing ideas that are less well articulated.  As businessmen, the right understands the long-term value of investing and they have done an outstanding job of building the infrastructure, of “marketing the message,” necessary to preserve and defend their interests.

The left has a very different conceptual view of human nature and the human condition.  The left gives money to grassroots organizations and demand that it all go “to the cause.”  Those causes are about helping people in need, nurturing, and taking responsibility for others.  Money spent on administration, communications infrastructure, and career development for progressive leaders is a diversion of money that is intended to “help.”  This is a fundamentally different worldview from that of the right, who see “good” people as those whose discipline and personal responsibility have already allowed them to become wealthy, or at least self reliant.  The conservative worldview says that “helping” spoils people, gives them things they have not earned, and keeps them undisciplined and dependent.  This conceptual difference, as framed by the right, explains why conservatives have done better at dominating our political discourse and direction.

When one projects these divergent worldviews onto the nation, it is easy to see that taxes “take away” resources that have been earned by “good, disciplined, self reliant” people and give those resources to the “undisciplined and dependent” people who have not earned it.  Tax “relief” is how the right frames the debate about taxes, implying that taxes are an affliction that must be overcome.  To oppose tax relief, therefore, is to be a villain, even unpatriotic. Consequently, Democrats have been forced to adopt language of the right, and by doing so, policies must follow.

In order to move the debate in ways that benefit workers, the owners of labor in our economy, we need to find a fundamentally different linguistic framework to talk about taxes and the role of government.  We need language that defines taxes as the price of being a patriotic American.  Taxes paid by previous generations are what made possible the infrastructure on which we rely now…the highways, the education system, the electric power grid, and the justice system…all of it.  Tea Party conservatives seem to view themselves as self reliant, but they are failing to recognize the enormous public and social infrastructure on which they rely and that makes their way of life possible.  We need to convince ordinary Americans on the right that the infrastructure on which they depend must be maintained and enhanced in order for our way of life to be sustained or improved. 

In fact, by not paying the taxes needed to maintain our national infrastructure, by not paying the dues for being an American, we are borrowing from the past and robbing from the future of our country.  Paying taxes should become an issue of patriotism, but instead, those who oppose taxes are now able to portray taxation as somehow unpatriotic.

Reframing the public discourse is a long-term project.  The right began investing in the infrastructure needed to frame public debate in the 1970’s.  By 1980, they had Ronald Reagan, who was able to use the infrastructure the right had developed and win the presidency.  The left needs to begin to invest in the same sorts of infrastructure that the right has been building for decades.  That won’t be an easy transition, based on the worldview of the left, but it must be done.

Progressive Democrats need to focus on identity and ideas, and move away from marketing issues they think will resonate with voters. And above all, they need to learn how to talk about identity and ideas in ways that ordinary Americans can understand.  It seems that when Democrats do talk about ideas and identity, they open themselves up to charges of elitism, East- and West-Coast intellectualism that is removed from the realities of working Americans.  That is a failure of conceptual framing of our public discussion.  We live in a sound bite era, and Progressives have yet to figure out how to talk about ideas and identity in sound bites.  The right does this very well.  And that is why they win at the ballot box. 

America’s System Failure: Only a Wave of Democratic Participation Can Save This Country

 I didn’t write this… but posted it because it is well worth reading!

America’s System Failure: Only a Wave of Democratic Participation Can Save This Country

As welcome as it was, the removal of George W. Bush was not enough to cure what ails us. It goes to the root of our political system.

by Christopher Hayes 

February 3, 2010

There is a widespread consensus that the decade we’ve just brought to a close was singularly disastrous for the country: the list of scandals, crises and crimes is so long that events that in another context would stand out as genuine lowlights — Enron and Arthur Andersen’s collapse, the 2003 Northeast blackout, the unsolved(!) anthrax attacks — are mere afterthoughts. We still don’t have a definitive name for this era, though Paul Krugman’s 2003 book The Great Unraveling captures well the sense of slow, inexorable dissolution; and the final crisis of the era, what we call the Great Recession, similarly expresses the sense that even our disasters aren’t quite epic enough to be cataclysmic. But as a character in Tracy Letts’s 2007 Pulitzer Prize-winning play, August: Osage County, says, “Dissipation is actually much worse than cataclysm.” American progressives were the first to identify that something was deeply wrong with the direction the country was heading in and the first to provide a working hypothesis for the cause: George W. Bush. During the initial wave of antiwar mobilization, in 2002, much of the ire focused on Bush himself. But as the decade stretched on, the causal account of the country’s problems grew outward in concentric circles: from Bush to his administration (most significantly, Cheney) to the Republican Party to — finally (and not inaccurately) — the entire project of conservative governance.

As much of the country came to share some version of this view (tenuously, but share it they did), the result was a series of Democratic electoral sweeps and a generation of Americans, the Millennials, with more liberal views than any of their elder cohorts. But it always seemed possible that the sheer reactionary insanity of the Bush administration would have a conservatizing effect on the American polity. Because things had gone so wrong, it was a more than natural reaction to long for the good old days; the Clinton years, characterized by deregulation and bubbles, seemed tantalizingly placid and prosperous in retrospect. The atavistic imperialism of the Bush administration had a way of making the pre-Bush foreign policy of soft imperialism and subtle bullying look positively saintly.

Toward the end of the decade, as the establishment definitively rebuked Bush and sought to distance itself from his failures, the big-tent center-left coalition took on an influential constituency — the Colin Powells and Warren Buffetts — who didn’t want reform so much as they wanted restoration. This was reflected in a strange internal tension in the Obama campaign rhetoric that simultaneously promised both: change you can believe in and, as Obama said at a March 2008 appearance in Pennsylvania, a foreign policy that is “actually a return to the traditional bipartisan realistic policy of George Bush’s father.”

If the working hypothesis that bound this unwieldy coalition together — independents, most liberals and the Washington establishment — was that the nation’s troubles were chiefly caused by the occupants of the White House, then this past year has served as a kind of natural experiment. We changed the independent variable (the party and people in power) and can observe the results. It is hard, I think, to come to any conclusion but that the former hypothesis was insufficient.

So what, exactly, is it that ails us?

In pondering the answer, it’s useful to distinguish between two separate categories of problems we face. The first are the human, economic and ecological disasters that demand immediate action: a grossly inefficient healthcare sector, millions un- or underinsured, 10 percent unemployment, a planet that’s warming, soaring personal bankruptcies, 12 million immigrants working in legal limbo, the list goes on. But the deeper problem, the ultimate cause of many of the first-order problems, is the perverse maldistribution of power in the country: too much in too few hands. It didn’t happen overnight, of course, and the devolution has been analyzed and decried by a host of writers and thinkers in these very pages.

It’s also not the first time. Indeed, the story of the American Republic is the never-ending task of redistributing power that always seems to collect and pool and re-form, a cycle in which we break up the power trusts, only to find them reassembling, Terminator 2-like, and requiring yet another dose of the founders’ revolutionary fervor to be broken up again.

The central and unique paradox of our politics at this moment, however, is that our institutions are so broken, the government so sclerotic and dysfunctional, that in almost all cases, from financial bailouts to health insurance mandates, the easiest means of addressing the first set of problems is to take steps that exacerbate the second.

As an illustration, consider the following hypothetical.

You’re a social worker or a parish priest in a poor urban neighborhood that lives under the malignant, if stable, stewardship of an organized-crime protection racket. The small business owners all have to pay a protection fee, which most of them can afford, but a significant portion of bodegas and nail salons operating on razor-thin profit margins struggle to come up with the money. When they fall short (which is often) they are subjected to beatings, harassment, vandalism and other petty cruelties.

Now, it turns out that you can raise enough money through your organization so that you can reliably cover the protection fees for the struggling shop owners operating on the margins. Whenever they can’t come up with enough money, you can make up the difference. The improvement to residents’ lives would be massive: no longer forced to live in fear, they would be allowed to transact their business and go about their lives free from the constant, degrading fear of physical violence. But by taking this action you would also be channeling revenue into the pockets of the protection racket and, perhaps more insidious, further entrenching its power by conceding its central premise: that all local businesses must pay up in order to survive.

This is, in rough allegorical fashion, the dilemma at the heart of the recent intra-left battle over the Senate version of the healthcare bill. Those arguing that the bill will be a massive step forward in reducing the misery of the uninsured are for the most part right. And those arguing that the Senate version of the bill is a grotesque sellout to Big Pharma and, to a lesser extent, Big Insurance, are more or less correct as well. When the White House used its muscle to kill a bipartisan amendment that would have allowed reimportation of drugs, it was as if our fictional social worker or priest took to shaking down shopkeepers to stay in the good graces of the local thugs. For what it’s worth, I’m generally in the pay-off-the-thugs camp, because of the concrete benefits it would provide (Medicaid expansion for 15 million) but also because by enshrining the notion that the government is responsible for managing the healthcare system, the crimes of the insurance racket can now be laid at the feet of our politicians. In the short run, that accountability may spell political trouble; in the long run, I’m hopeful that it will force the government to crack down.

That said, the whole system that produced this legislative approach sucks, and recalls nothing so much as the Bush/GOP passage of Medicare Part D.

In the abstract, the putative goal of Medicare Part D was laudable (even if it was driven by Karl Rove’s crass desire to curry favor with an important electoral demographic): reduce the cost of prescription drugs for seniors on Medicare. The method of achieving this laudable social end, however, was repugnant. Medicare was statutorily barred from using its market share to negotiate lower drug prices, thereby ensuring hefty (and largely unearned) profits for Big Pharma in perpetuity. Drug reimportation was off the table as well. And since Republicans don’t believe in taxes, and our political institutions are increasingly incapable of raising revenue, none of it was paid for. One Democratic Senate aide told me that right before his boss voted for final passage of the bill, the senator turned to him and said, “So, I guess I have to go vote for this piece of shit.”

At the time, Medicare Part D looked like the nadir of GOP governance, but two things have happened in the interim. One, the program, despite early chaos, has become quite popular: seniors like getting cheaper drugs. And two, the basic policy approach has been adopted, in somewhat altered form, by the Obama administration. We are all Medicare Part D now.

There’s a word for a governing philosophy that fuses the power of government and large corporations as a means of providing services and keeping the wheels of industry greased, and it’s a word that has begun to pop up among critics of everything from the TARP bailout to healthcare to cap and trade: corporatism. Since corporatism often merges the worst parts of Big Government and Big Business, it’s an ideal target for both the left and right. The ultimate corporatist moment, the bailout, was initially voted down in the House by an odd-bedfellows coalition of Progressive Caucus members and right-wingers.

In the wake of the healthcare sausage-making, writers from Tim Carney on the right (author of the provocative Obamanomics) and Glenn Greenwald on the left have attacked the bill as the latest incarnation of corporatism, a system they see as the true enemy. There is even some talk among activists of a grand left-right populist coalition coming together to depose the entrenched interests that hold sway in Washington. Jane Hamsher of Firedoglake touted her work with libertarians to oppose Ben Bernanke, more AIG bailouts and the Senate healthcare bill (“What we agree on: both parties are working against the interests of the public, the only difference is in the messaging”); David McKalip, the tea-party doctor who got into trouble for forwarding an image of Obama with a bone through his nose, wrote an open letter to the netroots proposing that they join him in fighting the “real enemy,” the “unholy corporate/government cabal that will control your healthcare.”

I don’t think that coalition is going to emerge in any meaningful form. The right’s anger is born largely of identity-based alienation, a fear of socialism (whatever that means nowadays) and an age-old Bircher suspicion that “they” are trying to screw “us.” Even in its most sophisticated forms, such as in Carney’s Obamanomics, the basic right-wing argument against corporatism embraces a kind of fatalism about government that assumes it will always devolve into a rat’s nest of rent seekers and cronies and therefore should be kept as small as possible.

But the progressive critics hold that we can and should do better. The Medicare Part D model is a terrible way of running a government for a number of reasons. First, and most practical, it’s expensive. When paying off protection rackets is the price of passing legislation, you have to come up with a lot more money. Allowing Medicare to negotiate drug prices would have saved the government as much as $30 billion a year. The strong public option would, according to the Congressional Budget Office, save $85 billion over ten years. Once everyone has laid claim to their vig, you soon find yourself tapped out.

The second problem is that this form of governance degrades the integrity of the state. Historian Tony Judt made this point eloquently in his October 19 lecture “What Is Living and What Is Dead in Social Democracy.” Delegating fundamental state activities to private actors, he said, “discredits the state.” Instead of a straightforward relationship between citizen and state, we have a mediated one that has the potential to perversely feed the anti-statist arguments of the right as the state becomes, in Judt’s words, “represented in the popular mind by a grasping private profiteer.”

But the corporatism on display in Washington is itself a symptom of a broader social illness that I noted above, a democracy that is pitched precariously on the tipping point of oligarchy. In an oligarchy, the only way to get change is to convince the oligarchs that it is in their interest — and increasingly, that’s the only kind of change we can get.

In 1911 the German democratic socialist Robert Michels faced a similar problem, and it was the impetus for his classic book Political Parties. He was motivated by a simple question: why were parties of the left, those most ideologically committed to democracy and participation, as oligarchical in their functioning as the self-consciously elitist and aristocratic parties of the right?

Michels’s answer was what he called “The Iron Law of Oligarchy.” In order for any kind of party or, indeed, any institution with a democratic base to exist, it must have an organization that delegates tasks. As this bureaucratic structure develops, it invests a small group of people with enough power that they can then subvert the very mechanisms by which they can be held to account: the party press, party conventions and delegate votes. “It is organization which gives birth to the domination of the elected over the electors,” he wrote, “of the mandataries over the mandators, of the delegates over the delegators. Who says organization, says oligarchy.”

Michels recognized the challenge his work presented to his comrades on the left and viewed the task of democratic socialists as a kind of noble, endless, Sisyphean endeavor, which he described by invoking a German fable. In it, a dying peasant tells his sons that he has buried a treasure in their fields. “After the old man’s death the sons dig everywhere in order to discover the treasure. They do not find it. But their indefatigable labor improves the soil and secures for them a comparative well-being.”

“The treasure in the fable may well symbolize democracy,” Michels wrote. “Democracy is a treasure which no one will ever discover by deliberate search. But in continuing our search, in laboring indefatigably to discover the undiscoverable, we shall perform a work which will have fertile results in the democratic sense.”

After a rather dispiriting few months, the treasure in this case may seem impossibly remote, but one thing the Obama campaign got right was its faith in America’s history of continually and fruitfully tilling the soil of democracy, struggling against odds until, at certain moments of profound progressive change, a new treasure is improbably found.

It was the possibility of such a democratic unearthing that gave Obama for America its moral force. The most inspiring thing about the campaign had nothing to do with the candidate and everything to do with average citizens from Dubuque to Atlanta who were taking the time and energy to search for a small piece of that treasure. Likewise, the message of the Obama campaign was as much about empowerment, reinvigorating democracy and changing the ways of Washington as it was about the central planks of his agenda. It’s for this reason that the greatest disappointment of his first year is the White House’s abandonment of this small-d democratic impulse in favor of a strategy almost wholly focused on insider politics.

What the country needs more than higher growth and lower unemployment, greater income equality, a new energy economy and drastically reduced carbon emissions is a redistribution of power, a society-wide epidemic of re-democratization. The crucial moments of American reform and progress have achieved this: from the direct election of senators to the National Labor Relations Act, from the breakup of the trusts to the end of Jim Crow.

So in this new year, while the White House focuses on playing within the existing rules, it’s our job as citizens and activists to press constantly for changes to those rules: public financing, an end to thea filibuster, the breakup of the banks, legalization for undocumented workers and the passage of the Employee Free Choice Act, to name just a few of the measures that would alter the balance of power and expand the frontiers of the possible.

If I had to bet, I’d say that not of one of these will be won this year. The White House won’t be of much help, and on some issues, like breaking up the banks, it will represent the opposition. Always searching and never quite finding is grueling and often dispiriting work. But there is simply no alternative other than to give in and let the field turn hard and barren.