The bipartisan, dysfunctional US economic policy

The USA has had a bipartisan economic policy for 20 or 30 years now.  It’s what some people call “neoliberalism.”

The basic idea is that prosperity depends on rich people investing in the economy, so that the key to prosperity is to allow rich people to accumulate money.

It is reducing upper-bracket tax rates, reducing government regulation and reducing government spending except on the military and police.

It is allowing manufacturing companies to become competitive by shifting production to low-wage countries, holding prices down by allowing cheap imports, and shrinking the social safety net to encourage people to take low-wage jobs.

It is giving financial institutions free rein to make risky investments, because free markets are important, and bailing them out when they fail, because large-scale financial failure would destabilize the economy.

It is not enforcing the antitrust laws because business consolidation supposedly promotes economic efficiency.

It is now than then enacting some benefit for working people, but never anything that threatens the incomes of the wealthy or the power of big corporations.

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The North American Free Trade Agreement is an example of neoliberal bipartisanship.  The idea for NAFTA originated in the Ronald Reagan administration, the George H.W. Bush administration negotiated it, but it took the Bill Clinton administration to get it approved.

NAFTA shifted the balance of power against organized labor.  Employers could credibly threaten to pick up and relocate in Mexico if workers didn’t give them what they wanted.

Another joker in NAFTA was the investor-state dispute resolution provision.  It gave foreign companies the right to ask for damages if a local, state or national government passed some law or regulation that reduced their profits.  The theory was that this was a trade barrier, the same as a tariff.  Investor-state disputes are decided not by courts, but by arbitrators.

The investor-state dispute resolution provision was a main reason why Congress declined to endorse President Obama’s proposed Trans-Pacific Partnership Agreement.  President Trump deserves credit for dropping the TPP.

The new U.S.-Canada-Mexico Agreement contains an investor-state dispute resolution provision.  However, unlike NAFTA,  it also contains labor and environmental standards and not just protections for companies.  If these turn out to be meaningful, President Trump and the present Congress will deserve a certain amount of credit.

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Bill Clinton was a good friend of the banking industry.  Early in his administration, Congress passed the Siegle-Neal Act, which eliminated restrictions on interstate banking.  Bank mergers followed in rapid succession.

He twice reappointed Alan Greenspan, advocate of banking deregulation, as chairman of the Federal Reserve Board.  He proposed and got repeal of the Glass-Steagall Act, which separated commercial banks, whose deposits were insured by the federal government, from investment banks, whose deposits could be risked in potentially high-profit investments.

His administration explicitly forbid regulation of derivatives, which are investments not backed by any tangible asset—essentially a form of gambling on the economy.  All these decisions set the stage for the Great Recession of 2007-2009.

Bill Clinton and his predecessor, George H.W. Bush, were possibly the last Presidents to try to balance the federal budget.  Thanks to the 1986 tax bill under the older Bush, the 1993 tax increase under Clinton and efforts by Clinton to control federal spending, the federal budget was actually in surplus when Clinton was succeeded by George W. Bush.

The younger Bush proceeded to spend the government into deficit by cutting upper-income taxes and increasing spending for the military and homeland security.   HIs administration reduced federal spending on education, scientific research and infrastructure, such as the New Orleans levees.

A home mortgage bubble expanded and burst.  It was worsened by financiers to took sub-prime mortgages—lending to home-buyers who weren’t likely to pay them back—and then packaged these mortgages as securitie.  Much of this involved financial fraud, first in reporting the financial condition of the borrowers and in falsely rating the securities as safe investments.

Barack Obama inherited the Bush recession.  His economic team bailed out the banks and prevented a financial collapse.  But the bankers and brokers whose recklessness endangered the financial system mostly suffered to penalty.  They didn’t even lose their bonuses!

There were virtually no prosecutions for financial fraud and no consideration to limiting the financial speculation that made the recession so bad.

The home buyers did not get off so easily.  Congress passed a Home Affordable Modification Program (HAMP) which supposedly helped borrowers reduce principal and interest.  But the money went to mortgage servicing companies, who made their money by collecting payments and had no financial incentive to help the borrowers.

Treasury Secretary Timothy Geithner said later that his aim was to “foam the runway” for the banks so as to stretch out mortgage defaults over a longer period of time so their balance sheets didn’t function.

Donald Trump inherited the Obama economy.  So far the economic boom has continued.  Upper income taxpayers got more tax breaks.  Regulatory agencies have been told to ease off.

I think another great recession is likely.  I don’t think President Trump has done anything in particular to cause it, but I don’t see that he has done anything in particular to prepare for it.

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The investment banking firm of Goldman Sachs made money out of the financial crisis.  They bought up subprime loans, repackaged them as securities and sold them, and then took financial positions so they made money when the price of the securities fell.  If you’re talking about draining the swamp, Goldman Sachs is one of the alligators.

Here are some charts showing how Clinton, Bush and Obama staffed their administrations from Goldman Sachs and other Wall Street businesses.

 

And here’s a list of Wall Street alumni in the Trump administration.

I don’t claim that everything these four administrations have done is bad.  My claim is that the USA during these four administrations has been going is an overall bad direction.

There’s much I haven’t written.  I haven’t documented all the points I made in my introduction.  I haven’t written about campaign finance and how it affects policy.  I haven’t written about public school privatization.  I haven’t written about recurring bipartisan proposals to “save” Social Security and Medicare by reducing benefits and raising the age of eligibility.  Another time, perhaps.

This article already is long, and I hope I’ve made my point—that the leaders of both the Democratic and Republican parties are responsible for the bad direction the USA is taking.

LINKS

Bill Clinton’s Five Major Achievements Were Longstanding GOP Objectives, an interview of Thomas Frank for Truthout.

The Economic Consequences of Mr. Bush by Joseph Stiglitz for Vanity Fair.

Obama pines for the era that created Trump in the first place by Robert Hennelly for Salon.

The Truth About the Trump Economy by Joseph Stiglitz for Project Syndicate.

Donald Trump’s Assault on the Social Safety Net by Ryan LaRochelle and Luisa Deprez for The Washington Monthly.

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