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.

Capitalist Fools by Joseph Stiglitz

Capitalist Fools

by Prof. Joseph E. Stiglitz

 

Behind the debate over remaking U.S. financial policy will be a debate over who’s to blame. It’s crucial to get the history right, writes a Nobel-laureate economist, identifying five key mistakes—under Reagan, Clinton, and Bush II—and one national delusion.

There will come a moment when the most urgent threats posed by the credit crisis have eased and the larger task before us will be to chart a direction for the economic steps ahead. This will be a dangerous moment. Behind the debates over future policy is a debate over history-a debate over the causes of our current situation. The battle for the past will determine the battle for the present. So it’s crucial to get the history straight.

What were the critical decisions that led to the crisis? Mistakes were made at every fork in the road-we had what engineers call a “system failure,” when not a single decision but a cascade of decisions produce a tragic result. Let’s look at five key moments.

No. 1: Firing the Chairman In 1987 the Reagan administration decided to remove Paul Volcker as chairman of the Federal Reserve Board and appoint Alan Greenspan in his place. Volcker had done what central bankers are supposed to do. On his watch, inflation had been brought down from more than 11 percent to under 4 percent. In the world of central banking, that should have earned him a grade of A+++ and assured his re-appointment. But Volcker also understood that financial markets need to be regulated. Reagan wanted someone who did not believe any such thing, and he found him in a devotee of the objectivist philosopher and free-market zealot Ayn Rand.

Greenspan played a double role. The Fed controls the money spigot, and in the early years of this decade, he turned it on full force. But the Fed is also a regulator. If you appoint an anti-regulator as your enforcer, you know what kind of enforcement you’ll get. A flood of liquidity combined with the failed levees of regulation proved disastrous.

Greenspan presided over not one but two financial bubbles. After the high-tech bubble popped, in 2000-2001, he helped inflate the housing bubble. The first responsibility of a central bank should be to maintain the stability of the financial system. If banks lend on the basis of artificially high asset prices, the result can be a meltdown-as we are seeing now, and as Greenspan should have known. He had many of the tools he needed to cope with the situation. To deal with the high-tech bubble, he could have increased margin requirements (the amount of cash people need to put down to buy stock). To deflate the housing bubble, he could have curbed predatory lending to low-income households and prohibited other insidious practices (the no-documentation-or “liar”-loans, the interest-only loans, and so on). This would have gone a long way toward protecting us. If he didn’t have the tools, he could have gone to Congress and asked for them.

Of course, the current problems with our financial system are not solely the result of bad lending. The banks have made mega-bets with one another through complicated instruments such as derivatives, credit-default swaps, and so forth. With these, one party pays another if certain events happen-for instance, if Bear Stearns goes bankrupt, or if the dollar soars. These instruments were originally created to help manage risk-but they can also be used to gamble. Thus, if you felt confident that the dollar was going to fall, you could make a big bet accordingly, and if the dollar indeed fell, your profits would soar. The problem is that, with this complicated intertwining of bets of great magnitude, no one could be sure of the financial position of anyone else-or even of one’s own position. Not surprisingly, the credit markets froze.

Here too Greenspan played a role. When I was chairman of the Council of Economic Advisers, during the Clinton administration, I served on a committee of all the major federal financial regulators, a group that included Greenspan and Treasury Secretary Robert Rubin. Even then, it was clear that derivatives posed a danger. We didn’t put it as memorably as Warren Buffett-who saw derivatives as “financial weapons of mass destruction”-but we took his point. And yet, for all the risk, the deregulators in charge of the financial system-at the Fed, at the Securities and Exchange Commission, and elsewhere-decided to do nothing, worried that any action might interfere with “innovation” in the financial system. But innovation, like “change,” has no inherent value. It can be bad (the “liar” loans are a good example) as well as good.

No. 2: Tearing Down the Walls The deregulation philosophy would pay unwelcome dividends for years to come. In November 1999, Congress repealed the Glass-Steagall Act-the culmination of a $300 million lobbying effort by the banking and financial-services industries, and spearheaded in Congress by Senator Phil Gramm. Glass-Steagall had long separated commercial banks (which lend money) and investment banks (which organize the sale of bonds and equities); it had been enacted in the aftermath of the Great Depression and was meant to curb the excesses of that era, including grave conflicts of interest. For instance, without separation, if a company whose shares had been issued by an investment bank, with its strong endorsement, got into trouble, wouldn’t its commercial arm, if it had one, feel pressure to lend it money, perhaps unwisely? An ensuing spiral of bad judgment is not hard to foresee. I had opposed repeal of Glass-Steagall. The proponents said, in effect, Trust us: we will create Chinese walls to make sure that the problems of the past do not recur. As an economist, I certainly possessed a healthy degree of trust, trust in the power of economic incentives to bend human behavior toward self-interest-toward short-term self-interest, at any rate, rather than Tocqueville’s “self interest rightly understood.”

The most important consequence of the repeal of Glass-Steagall was indirect-it lay in the way repeal changed an entire culture. Commercial banks are not supposed to be high-risk ventures; they are supposed to manage other people’s money very conservatively. It is with this understanding that the government agrees to pick up the tab should they fail. Investment banks, on the other hand, have traditionally managed rich people’s money-people who can take bigger risks in order to get bigger returns. When repeal of Glass-Steagall brought investment and commercial banks together, the investment-bank culture came out on top. There was a demand for the kind of high returns that could be obtained only through high leverage and big risktaking.

There were other important steps down the deregulatory path. One was the decision in April 2004 by the Securities and Exchange Commission, at a meeting attended by virtually no one and largely overlooked at the time, to allow big investment banks to increase their debt-to-capital ratio (from 12:1 to 30:1, or higher) so that they could buy more mortgage-backed securities, inflating the housing bubble in the process. In agreeing to this measure, the S.E.C. argued for the virtues of self-regulation: the peculiar notion that banks can effectively police themselves. Self-regulation is preposterous, as even Alan Greenspan now concedes, and as a practical matter it can’t, in any case, identify systemic risks-the kinds of risks that arise when, for instance, the models used by each of the banks to manage their portfolios tell all the banks to sell some security all at once.

As we stripped back the old regulations, we did nothing to address the new challenges posed by 21st-century markets. The most important challenge was that posed by derivatives. In 1998 the head of the Commodity Futures Trading Commission, Brooksley Born, had called for such regulation-a concern that took on urgency after the Fed, in that same year, engineered the bailout of Long-Term Capital Management, a hedge fund whose trillion-dollar-plus failure threatened global financial markets. But Secretary of the Treasury Robert Rubin, his deputy, Larry Summers, and Greenspan were adamant-and successful-in their opposition. Nothing was done.

No. 3: Applying the Leeches Then along came the Bush tax cuts, enacted first on June 7, 2001, with a follow-on installment two years later. The president and his advisers seemed to believe that tax cuts, especially for upper-income Americans and corporations, were a cure-all for any economic disease-the modern-day equivalent of leeches. The tax cuts played a pivotal role in shaping the background conditions of the current crisis. Because they did very little to stimulate the economy, real stimulation was left to the Fed, which took up the task with unprecedented low-interest rates and liquidity. The war in Iraq made matters worse, because it led to soaring oil prices. With America so dependent on oil imports, we had to spend several hundred billion more to purchase oil-money that otherwise would have been spent on American goods. Normally this would have led to an economic slowdown, as it had in the 1970s. But the Fed met the challenge in the most myopic way imaginable. The flood of liquidity made money readily available in mortgage markets, even to those who would normally not be able to borrow. And, yes, this succeeded in forestalling an economic downturn; America’s household saving rate plummeted to zero. But it should have been clear that we were living on borrowed money and borrowed time.

The cut in the tax rate on capital gains contributed to the crisis in another way. It was a decision that turned on values: those who speculated (read: gambled) and won were taxed more lightly than wage earners who simply worked hard. But more than that, the decision encouraged leveraging, because interest was tax-deductible. If, for instance, you borrowed a million to buy a home or took a $100,000 home-equity loan to buy stock, the interest would be fully deductible every year. Any capital gains you made were taxed lightly-and at some possibly remote day in the future. The Bush administration was providing an open invitation to excessive borrowing and lending-not that American consumers needed any more encouragement.

No. 4: Faking the Numbers Meanwhile, on July 30, 2002, in the wake of a series of major scandals-notably the collapse of WorldCom and Enron-Congress passed the Sarbanes-Oxley Act. The scandals had involved every major American accounting firm, most of our banks, and some of our premier companies, and made it clear that we had serious problems with our accounting system. Accounting is a sleep-inducing topic for most people, but if you can’t have faith in a company’s numbers, then you can’t have faith in anything about a company at all. Unfortunately, in the negotiations over what became Sarbanes-Oxley a decision was made not to deal with what many, including the respected former head of the S.E.C. Arthur Levitt, believed to be a fundamental underlying problem: stock options. Stock options have been defended as providing healthy incentives toward good management, but in fact they are “incentive pay” in name only. If a company does well, the C.E.O. gets great rewards in the form of stock options; if a company does poorly, the compensation is almost as substantial but is bestowed in other ways. This is bad enough. But a collateral problem with stock options is that they provide incentives for bad accounting: top management has every incentive to provide distorted information in order to pump up share prices.

The incentive structure of the rating agencies also proved perverse. Agencies such as Moody’s and Standard & Poor’s are paid by the very people they are supposed to grade. As a result, they’ve had every reason to give companies high ratings, in a financial version of what college professors know as grade inflation. The rating agencies, like the investment banks that were paying them, believed in financial alchemy-that F-rated toxic mortgages could be converted into products that were safe enough to be held by commercial banks and pension funds. We had seen this same failure of the rating agencies during the East Asia crisis of the 1990s: high ratings facilitated a rush of money into the region, and then a sudden reversal in the ratings brought devastation. But the financial overseers paid no attention.

No. 5: Letting It Bleed The final turning point came with the passage of a bailout package on October 3, 2008-that is, with the administration’s response to the crisis itself. We will be feeling the consequences for years to come. Both the administration and the Fed had long been driven by wishful thinking, hoping that the bad news was just a blip, and that a return to growth was just around the corner. As America’s banks faced collapse, the administration veered from one course of action to another. Some institutions (Bear Stearns, A.I.G., Fannie Mae, Freddie Mac) were bailed out. Lehman Brothers was not. Some shareholders got something back. Others did not.

The original proposal by Treasury Secretary Henry Paulson, a three-page document that would have provided $700 billion for the secretary to spend at his sole discretion, without oversight or judicial review, was an act of extraordinary arrogance. He sold the program as necessary to restore confidence. But it didn’t address the underlying reasons for the loss of confidence. The banks had made too many bad loans. There were big holes in their balance sheets. No one knew what was truth and what was fiction. The bailout package was like a massive transfusion to a patient suffering from internal bleeding-and nothing was being done about the source of the problem, namely all those foreclosures. Valuable time was wasted as Paulson pushed his own plan, “cash for trash,” buying up the bad assets and putting the risk onto American taxpayers. When he finally abandoned it, providing banks with money they needed, he did it in a way that not only cheated America’s taxpayers but failed to ensure that the banks would use the money to re-start lending. He even allowed the banks to pour out money to their shareholders as taxpayers were pouring money into the banks.

The other problem not addressed involved the looming weaknesses in the economy. The economy had been sustained by excessive borrowing. That game was up. As consumption contracted, exports kept the economy going, but with the dollar strengthening and Europe and the rest of the world declining, it was hard to see how that could continue. Meanwhile, states faced massive drop-offs in revenues-they would have to cut back on expenditures. Without quick action by government, the economy faced a downturn. And even if banks had lent wisely-which they hadn’t-the downturn was sure to mean an increase in bad debts, further weakening the struggling financial sector.

The administration talked about confidence building, but what it delivered was actually a confidence trick. If the administration had really wanted to restore confidence in the financial system, it would have begun by addressing the underlying problems-the flawed incentive structures and the inadequate regulatory system.

Was there any single decision which, had it been reversed, would have changed the course of history? Every decision-including decisions not to do something, as many of our bad economic decisions have been-is a consequence of prior decisions, an interlinked web stretching from the distant past into the future. You’ll hear some on the right point to certain actions by the government itself-such as the Community Reinvestment Act, which requires banks to make mortgage money available in low-income neighborhoods. (Defaults on C.R.A. lending were actually much lower than on other lending.) There has been much finger-pointing at Fannie Mae and Freddie Mac, the two huge mortgage lenders, which were originally government-owned. But in fact they came late to the subprime game, and their problem was similar to that of the private sector: their C.E.O.’s had the same perverse incentive to indulge in gambling.

The truth is most of the individual mistakes boil down to just one: a belief that markets are self-adjusting and that the role of government should be minimal. Looking back at that belief during hearings this fall on Capitol Hill, Alan Greenspan said out loud, “I have found a flaw.” Congressman Henry Waxman pushed him, responding, “In other words, you found that your view of the world, your ideology, was not right; it was not working.” “Absolutely, precisely,” Greenspan said. The embrace by America-and much of the rest of the world-of this flawed economic philosophy made it inevitable that we would eventually arrive at the place we are today.