The Squandering of America: How the Failure of Our Politics Undermines Our Prosperity (Review)
May 1, 2008            

The Squandering of America: How the Failure of Our Politics Undermines Our Prosperity by Robert Kuttner. Knopf, 337 pages, $26.95.


Reviewed by George Scialabba


In one sense, The Squandering of America is misnamed. One squanders (American Heritage Dictionary: "spend extravagantly; waste; dissipate") one's own wealth, not other people's; one can only squander what one already possesses (or, in the case of a trustee, controls). But the corporate and financial elites who play the leading role in Robert Kuttner's excellent new book are shown not spending but acquiring: manipulating or rewriting economic rules in order to loot their shareholders, beggar their workers, and shift their tax obligations onto their fellow citizens. Arguably, Kuttner's book should be titled The Plundering of America.

Then again, perhaps "squandering" is the right word. The quarter-century or so of what Kuttner calls "managed capitalism" - the New Deal and its international counterpart, the Bretton Woods regime - was America's golden age of broadly based prosperity and increased security for working people. If the economy had continued to grow at the same pace and with the same income distribution as in those decades, present-day America would be a far richer, safer, happier, healthier, and fairer country - truly America the Beautiful. But that opportunity was tragically wasted - squandered - through a combination of ideological delusion and raw greed. Kuttner tells this painful story extremely well.

Though challenged periodically by labor unions, Populist farmers, and Progressive reformers, business elites dominated American politics from the beginnings of industrialization in the second half of the nineteenth century. But when the economy collapsed in the 1930s, business could no longer stave off substantial regulation; and the collective effort called forth by World War II gave rise to a modicum of social solidarity. The resulting institutions of managed capitalism included labor legislation, unemployment insurance, tuition assistance through the GI Bill, mortgage assistance for first-time home-buyers, Social Security, Medicaid, a fiscal policy aimed at full employment, a structure of mainly reasonable industrial and financial regulations (along with a serious commitment to enforce them), and a decently progressive income tax; internationally, a fixed-rate currency exchange system, limits on financial capital flows, and, in the World Bank and International Monetary Fund, instruments of stabilization and reconstruction for national economies in trouble. Together, these policies produced a high level of widely shared economic well-being and security. For a brief, bright interval, capitalism worked properly.

The economic turbulence caused by Indochina war expenditures and a sharp rise in oil prices, along with racial and cultural polarization, nourished a conservative backlash. Nixon did not attack the welfare state directly, but he did withdraw the United States from the Bretton Woods agreement. Carter initiated the fateful estrangement of the Democratic Party from its New Deal heritage, which culminated in the Wall Street-dominated Democratic Leadership Council. Ronald Reagan was not elected to dismantle the New Deal and may not even have understood that this was what the rest of his administration was up to. But his large and regressive tax cuts, as well as a cascade of deregulation and non-enforcement, massively increased military spending, and the heavy-handed use of the IMF and World Bank (with an assist from the CIA when necessary) to force a "favorable investment climate" (i.e., low wages and unrestricted capital flows) on the developing world - all these policies began to change America from a middle-class society and mixed economy with countervailing power centers to a sharply unequal, business-dominated society.

The Clinton administration increased taxes on the rich and restored a modicum of integrity to the regulatory apparatus. But it also joined the rhetorical assault on "big government" and sponsored considerable deregulation, both on Wall Street and by means of "free trade" agreements, which sought to reduce the leverage of organized labor and democratic governments over American investors. Under the Bush/Cheney administration and the Gingrich/DeLay congress, America has degenerated into a thoroughly corrupt plutocracy.

This enormous rightward shift has been by propelled by overt and covert forces: ideology and money. The belief has spread over the last several decades that government action for the purpose of redistribution, environmental protection, consumer protection, or worker protection is almost always less efficient and fair than leaving such purposes to be achieved through unregulated interactions - chiefly buying and selling - among individuals and businesses. The writings of Friedrich Hayek, Milton Friedman, and Robert Nozick have been influential in propagating this view, along with the far cruder fulminations of Ayn Rand and the simple-minded slogans of Ronald Reagan. Kuttner's last book, Everything for Sale: The Virtues and Limits of Markets (1997), persuasively confuted this shallow but lamentably widespread creed. "The claim that markets optimize outcomes is true in some realms but blatantly false in many others. Markets do not efficiently deliver health care, research, education, pollution control, or the distribution of income and outlay generally. ... Leave health care to the market, and some people will die in the street for want of medical attention, the sick will be ejected from health plans, doctors will be turned against patients, and insurance companies and drug magnates will grow very rich. Leave electricity to the market, and both price gouging and system failures will ensue. Leave the financial market to its own discipline, and you court massive insider corruption and the risk of collapse."

Like all complex institutions, markets rest on supporting structures of rules, impartially devised and enforced. That requires politics, preferably democratic politics. And no rules, however well formulated and enforced, can prevent large differences in initial endowments of ability, resources, and information from producing extreme and permanent inequality. That requires redistribution. Public or collective goods - infrastructure, literacy, basic science, clean air - cannot be privately owned and so will not be privately produced. That requires public investment. A viable society requires civic virtue, above all an irreducible minimum of selflessness. Laissez-faire ideology cannot generate, or even comprehend, selflessness. As Kuttner writes: "Trust, civility, long-term commitment, and the art of consensual deliberation are the antithesis of pure markets and the essence of effective politics."

Everything for Sale pointed out the flaws in laissez-faire theory; The Squandering of America rehearses its dire consequences. Actually, that statement needs some qualification: the situation is indeed dire, but laissez faire is not exactly what the Republican Party in power has been practicing. The theory justifies minimal government on the premise that those who reap the rewards of risky behavior in unregulated markets will also pay the costs of their failures. But such people (or corporations) tend to be major political donors and therefore cannot be allowed to suffer very much. They must be bailed out. Privatize the gains, socialize the losses: this is what laissez-faire capitalism amounts to in the Reagan/Gingrich/Bush II era. Enron, WorldCom, Tyco, the savings and loan industry, Third World debt, the subprime mortgage industry - in all these cases, investment banks, hedge funds, and corporate management reaped colossal profits as long as the bubble lasted, while small investors, employees, and taxpayers mostly paid the costs of collapse.

"Efficiency," "incentives," personal responsibility," "the ownership society" and other slogans have served to disguise class warfare: a sustained assault on the income and security of the vast majority. Republican administrations have refused to enforce labor laws, allowing employer coercion to stifle union organizing and thereby decimating the labor movement. There has thus been little effective opposition as more and more employers have abandoned or downgraded their health insurance coverage and pension plans. Unemployment insurance was curtailed, and the federal minimum wage stuck at the same level for a decade or more. The progressivity of the tax code was undermined directly - by lowering top tax rates, capital gains taxes, and inheritance taxes, while raising payroll taxes - and indirectly - by underfunding the IRS and shifting enforcement priorities from corporations and rich individuals to low- and middle-income taxpayers. Not to mention the steady accretion of special-interest loopholes and the increasing popularity of tax evasion by the wealthy - Kuttner notes that "estimates of otherwise taxable capital kept beyond the reach of national tax authorities" are "about $9 trillion." The elimination of longstanding conflict-of-interest rules (those, for example, separating investment banking from commercial banking); limited liability for law and accounting firms; non-enforcement of capital reserve requirements; the absence of any regulation of hedge funds or derivative trading; the lack of corporate governance reform - all these policies have completed America's evolution into what Kuttner aptly calls a "casino economy." As in any casino, the house (in this case, Wall Street) is always the big winner.

"Free trade" is a second front in the war on the New Deal. If free trade means unrestricted access for foreign exporters and investors, then no country has ever practiced free trade. As Kuttner points out, England, the United States, continental Europe, China, Japan, South Korea, Taiwan, and every other economically successful country have practiced "strategic" trade and managed capitalism. All have identified key industries and technologies and nurtured them by targeting subsidies, limiting imports and foreign ownership, and demanding technology transfer in exchange for a favorable investment climate. All protected their currencies by limiting speculative foreign capital flows. All tolerated domestic cartels, tariffs, and piracy of foreign intellectual property. Only when a country gained global economic hegemony (England in the mid-nineteenth century, the United States in the late twentieth) did it demand an end to economic nationalism.

For reasons related to the Cold War, the US allowed Japan, South Korea, and Taiwan to ignore laissez-faire principles and free-trade theory. Why was this tolerated by American manufacturers, many of whom lost market share as a result? Other reasons have reconciled them to East Asian mercantilism. Low wages, low taxes, and lax environmental standards offshore help undermine American wages and tempt American localities bidding for investment to lower or eliminate taxes and environmental protections.

There is a third major cause of America's economic decline, about which Kuttner has less to say: military spending. The costs of empire are immense. According to political scientist Chalmers Johnson, "it is virtually impossible to overstate the profligacy of what our government spends on the military." One study from the late 1980s showed that in the preceding four decades, the sum of US defense expenditures equaled the value in 1985 of America's entire capital stock. And there has been, of course, no "peace dividend" after the Cold War. For FY 2008, if one includes the cost of the Iraq and Afghanistan wars, medical care for the casualties of those wars, military pensions, nuclear weapons, NASA, counterterrorism and homeland security, and interest payments on past debt-financed military expenditures, total defense-related spending equals $1.1 trillion. Fiscally, we may already be over the cliff.

The damage is inestimable; the squandering is unforgiveable. Something must be done. What to do is the easy part. Kuttner is a close student of European social democracy and convincingly defends its form of managed capitalism against American detractors. Europe's economy is, broadly, as efficient and innovative as America's, and its population has more leisure, job security, social supports, and quality health care. The US could doubtless catch up by returning to the spirit of the New Deal. The steps are obvious: roll back the Bush tax cuts, curtail tax evasion by the rich, regulate the casino economy, extend Medicare to all, equalize per-pupil expenditures, reduce military spending, link trade agreements to foreign labor rights, reform campaign finances, and appoint people to the Labor Department, FDA, HUD, EPA, SEC, and IRS who want to achieve rather than frustrate the purposes of these agencies. If there is a will, these are plainly the ways.

But where is the will? Where is the country's republican pride, its democratic honor? Why is American politics so far to the right not only of European but even of American public opinion? Why are our elected representatives so often corrupt mediocrities? Why are so many Americans either ignorant and resentful or demoralized and passive? What should one do when the best of one's fellow citizens lack all conviction, while the worst are full of passionate intensity?

Kuttner does not address these questions; they're not his brief. He's written a superb polemic, which in a healthy civic culture would sweep all before it, and his readers will be grateful. But how, in the money-manipulated puppet theater that is American politics today, to give it effect?

[END]

GEORGE SCIALABBA (www.georgescialabba.net) is the author of Divided Mind and the forthcoming What Are Intellectuals Good For?

        
           

The Squandering of America: How the Failure of Our Politics Undermines Our Prosperity by Robert Kuttner. Knopf, 337 pages, $26.95.


Reviewed by George Scialabba


In one sense, The Squandering of America is misnamed. One squanders (American Heritage Dictionary: "spend extravagantly; waste; dissipate") one's own wealth, not other people's; one can only squander what one already possesses (or, in the case of a trustee, controls). But the corporate and financial elites who play the leading role in Robert Kuttner's excellent new book are shown not spending but acquiring: manipulating or rewriting economic rules in order to loot their shareholders, beggar their workers, and shift their tax obligations onto their fellow citizens. Arguably, Kuttner's book should be titled The Plundering of America.

Then again, perhaps "squandering" is the right word. The quarter-century or so of what Kuttner calls "managed capitalism" - the New Deal and its international counterpart, the Bretton Woods regime - was America's golden age of broadly based prosperity and increased security for working people. If the economy had continued to grow at the same pace and with the same income distribution as in those decades, present-day America would be a far richer, safer, happier, healthier, and fairer country - truly America the Beautiful. But that opportunity was tragically wasted - squandered - through a combination of ideological delusion and raw greed. Kuttner tells this painful story extremely well.

Though challenged periodically by labor unions, Populist farmers, and Progressive reformers, business elites dominated American politics from the beginnings of industrialization in the second half of the nineteenth century. But when the economy collapsed in the 1930s, business could no longer stave off substantial regulation; and the collective effort called forth by World War II gave rise to a modicum of social solidarity. The resulting institutions of managed capitalism included labor legislation, unemployment insurance, tuition assistance through the GI Bill, mortgage assistance for first-time home-buyers, Social Security, Medicaid, a fiscal policy aimed at full employment, a structure of mainly reasonable industrial and financial regulations (along with a serious commitment to enforce them), and a decently progressive income tax; internationally, a fixed-rate currency exchange system, limits on financial capital flows, and, in the World Bank and International Monetary Fund, instruments of stabilization and reconstruction for national economies in trouble. Together, these policies produced a high level of widely shared economic well-being and security. For a brief, bright interval, capitalism worked properly.

The economic turbulence caused by Indochina war expenditures and a sharp rise in oil prices, along with racial and cultural polarization, nourished a conservative backlash. Nixon did not attack the welfare state directly, but he did withdraw the United States from the Bretton Woods agreement. Carter initiated the fateful estrangement of the Democratic Party from its New Deal heritage, which culminated in the Wall Street-dominated Democratic Leadership Council. Ronald Reagan was not elected to dismantle the New Deal and may not even have understood that this was what the rest of his administration was up to. But his large and regressive tax cuts, as well as a cascade of deregulation and non-enforcement, massively increased military spending, and the heavy-handed use of the IMF and World Bank (with an assist from the CIA when necessary) to force a "favorable investment climate" (i.e., low wages and unrestricted capital flows) on the developing world - all these policies began to change America from a middle-class society and mixed economy with countervailing power centers to a sharply unequal, business-dominated society.

The Clinton administration increased taxes on the rich and restored a modicum of integrity to the regulatory apparatus. But it also joined the rhetorical assault on "big government" and sponsored considerable deregulation, both on Wall Street and by means of "free trade" agreements, which sought to reduce the leverage of organized labor and democratic governments over American investors. Under the Bush/Cheney administration and the Gingrich/DeLay congress, America has degenerated into a thoroughly corrupt plutocracy.

This enormous rightward shift has been by propelled by overt and covert forces: ideology and money. The belief has spread over the last several decades that government action for the purpose of redistribution, environmental protection, consumer protection, or worker protection is almost always less efficient and fair than leaving such purposes to be achieved through unregulated interactions - chiefly buying and selling - among individuals and businesses. The writings of Friedrich Hayek, Milton Friedman, and Robert Nozick have been influential in propagating this view, along with the far cruder fulminations of Ayn Rand and the simple-minded slogans of Ronald Reagan. Kuttner's last book, Everything for Sale: The Virtues and Limits of Markets (1997), persuasively confuted this shallow but lamentably widespread creed. "The claim that markets optimize outcomes is true in some realms but blatantly false in many others. Markets do not efficiently deliver health care, research, education, pollution control, or the distribution of income and outlay generally. ... Leave health care to the market, and some people will die in the street for want of medical attention, the sick will be ejected from health plans, doctors will be turned against patients, and insurance companies and drug magnates will grow very rich. Leave electricity to the market, and both price gouging and system failures will ensue. Leave the financial market to its own discipline, and you court massive insider corruption and the risk of collapse."

Like all complex institutions, markets rest on supporting structures of rules, impartially devised and enforced. That requires politics, preferably democratic politics. And no rules, however well formulated and enforced, can prevent large differences in initial endowments of ability, resources, and information from producing extreme and permanent inequality. That requires redistribution. Public or collective goods - infrastructure, literacy, basic science, clean air - cannot be privately owned and so will not be privately produced. That requires public investment. A viable society requires civic virtue, above all an irreducible minimum of selflessness. Laissez-faire ideology cannot generate, or even comprehend, selflessness. As Kuttner writes: "Trust, civility, long-term commitment, and the art of consensual deliberation are the antithesis of pure markets and the essence of effective politics."

Everything for Sale pointed out the flaws in laissez-faire theory; The Squandering of America rehearses its dire consequences. Actually, that statement needs some qualification: the situation is indeed dire, but laissez faire is not exactly what the Republican Party in power has been practicing. The theory justifies minimal government on the premise that those who reap the rewards of risky behavior in unregulated markets will also pay the costs of their failures. But such people (or corporations) tend to be major political donors and therefore cannot be allowed to suffer very much. They must be bailed out. Privatize the gains, socialize the losses: this is what laissez-faire capitalism amounts to in the Reagan/Gingrich/Bush II era. Enron, WorldCom, Tyco, the savings and loan industry, Third World debt, the subprime mortgage industry - in all these cases, investment banks, hedge funds, and corporate management reaped colossal profits as long as the bubble lasted, while small investors, employees, and taxpayers mostly paid the costs of collapse.

"Efficiency," "incentives," personal responsibility," "the ownership society" and other slogans have served to disguise class warfare: a sustained assault on the income and security of the vast majority. Republican administrations have refused to enforce labor laws, allowing employer coercion to stifle union organizing and thereby decimating the labor movement. There has thus been little effective opposition as more and more employers have abandoned or downgraded their health insurance coverage and pension plans. Unemployment insurance was curtailed, and the federal minimum wage stuck at the same level for a decade or more. The progressivity of the tax code was undermined directly - by lowering top tax rates, capital gains taxes, and inheritance taxes, while raising payroll taxes - and indirectly - by underfunding the IRS and shifting enforcement priorities from corporations and rich individuals to low- and middle-income taxpayers. Not to mention the steady accretion of special-interest loopholes and the increasing popularity of tax evasion by the wealthy - Kuttner notes that "estimates of otherwise taxable capital kept beyond the reach of national tax authorities" are "about $9 trillion." The elimination of longstanding conflict-of-interest rules (those, for example, separating investment banking from commercial banking); limited liability for law and accounting firms; non-enforcement of capital reserve requirements; the absence of any regulation of hedge funds or derivative trading; the lack of corporate governance reform - all these policies have completed America's evolution into what Kuttner aptly calls a "casino economy." As in any casino, the house (in this case, Wall Street) is always the big winner.

"Free trade" is a second front in the war on the New Deal. If free trade means unrestricted access for foreign exporters and investors, then no country has ever practiced free trade. As Kuttner points out, England, the United States, continental Europe, China, Japan, South Korea, Taiwan, and every other economically successful country have practiced "strategic" trade and managed capitalism. All have identified key industries and technologies and nurtured them by targeting subsidies, limiting imports and foreign ownership, and demanding technology transfer in exchange for a favorable investment climate. All protected their currencies by limiting speculative foreign capital flows. All tolerated domestic cartels, tariffs, and piracy of foreign intellectual property. Only when a country gained global economic hegemony (England in the mid-nineteenth century, the United States in the late twentieth) did it demand an end to economic nationalism.

For reasons related to the Cold War, the US allowed Japan, South Korea, and Taiwan to ignore laissez-faire principles and free-trade theory. Why was this tolerated by American manufacturers, many of whom lost market share as a result? Other reasons have reconciled them to East Asian mercantilism. Low wages, low taxes, and lax environmental standards offshore help undermine American wages and tempt American localities bidding for investment to lower or eliminate taxes and environmental protections.

There is a third major cause of America's economic decline, about which Kuttner has less to say: military spending. The costs of empire are immense. According to political scientist Chalmers Johnson, "it is virtually impossible to overstate the profligacy of what our government spends on the military." One study from the late 1980s showed that in the preceding four decades, the sum of US defense expenditures equaled the value in 1985 of America's entire capital stock. And there has been, of course, no "peace dividend" after the Cold War. For FY 2008, if one includes the cost of the Iraq and Afghanistan wars, medical care for the casualties of those wars, military pensions, nuclear weapons, NASA, counterterrorism and homeland security, and interest payments on past debt-financed military expenditures, total defense-related spending equals $1.1 trillion. Fiscally, we may already be over the cliff.

The damage is inestimable; the squandering is unforgiveable. Something must be done. What to do is the easy part. Kuttner is a close student of European social democracy and convincingly defends its form of managed capitalism against American detractors. Europe's economy is, broadly, as efficient and innovative as America's, and its population has more leisure, job security, social supports, and quality health care. The US could doubtless catch up by returning to the spirit of the New Deal. The steps are obvious: roll back the Bush tax cuts, curtail tax evasion by the rich, regulate the casino economy, extend Medicare to all, equalize per-pupil expenditures, reduce military spending, link trade agreements to foreign labor rights, reform campaign finances, and appoint people to the Labor Department, FDA, HUD, EPA, SEC, and IRS who want to achieve rather than frustrate the purposes of these agencies. If there is a will, these are plainly the ways.

But where is the will? Where is the country's republican pride, its democratic honor? Why is American politics so far to the right not only of European but even of American public opinion? Why are our elected representatives so often corrupt mediocrities? Why are so many Americans either ignorant and resentful or demoralized and passive? What should one do when the best of one's fellow citizens lack all conviction, while the worst are full of passionate intensity?

Kuttner does not address these questions; they're not his brief. He's written a superb polemic, which in a healthy civic culture would sweep all before it, and his readers will be grateful. But how, in the money-manipulated puppet theater that is American politics today, to give it effect?

[END]

GEORGE SCIALABBA (www.georgescialabba.net) is the author of Divided Mind and the forthcoming What Are Intellectuals Good For?