Better Capitalism!

The economy is rather sucky right now. Even in Minnesota, it’s looking none too swell. And no one has a clear plan for dealing with it.

I don’t, and you shouldn’t trust me if I did. I’m just a humble citizen and a bit of an economic history geek. I don’t even look like an economist. But my amateur study of history suggests that there shouldn’t be a plan for the economy. Capitalism is too creative, and too unpredictable.

But it’s also clear that we can’t wait (as Jason Lewis is found of yelling—of course, he’s almost always yelling, like Mel Blanc doing Yosemite Sam) to “let the market take care of it!” The “market,” primarily in the financial services industry, helped get us into this mess.

On the other hand, the market has also given us a lot of wonderful things over the past six decades. But it has done so primarily because starting in the 1930s, we set a few boundaries for its operation.

In his magnificent Pulitzer Prize–winning history of the 1930s and 1940s, Freedom From Fear, David Kennedy notes that the fundamental idea behind the New Deal “can be summarized in a single word: security—security for individuals, to be sure...but security for capitalists and consumers, for workers and employers, for corporations and farms and homeowners and builders as well.”

The New Deal didn’t bring about recovery. For one thing, Franklin Roosevelt’s programs were too scattershot. He was trying to anything to see what would stick to the wall. By 1938, with the New Deal basically over, American business felt more confident that things in Washington had settled down, and it could begin to invest again without worrying about what FDR would throw at it next.

But the New Deal’s most successful programs sought to smooth out the peaks and valleys of the business cycle so that a Great Depression wouldn’t happen again. Take the establishment of the Securities and Exchange Commission, which unleashed a wealth of information about companies and how they're run, making the investment process more transparent. “This was less a reform than it was the rationalization of capitalism, along the lines of capitalism's own claims about how free markets were supposed to work,” Kennedy writes.

The “gilded age” periods of the 1880s, 1920s, and the 2000s have given capitalism a black eye. What’s needed is to make the market work for everyone—as it did in the 1950s and 1960s (and, to a more limited extent, in the 1990s)—not just for a relative few.

Think of regulation this way: The idea is not to put a rope around all the milk cows and direct them, but to put a fence around the pasture. The cows should still have plenty of room to roam, but they’ll stay within useful boundaries. Outside, perhaps, of a few asocial mavericks, everyone will do better.

An Economy About Nothing

Hat tip to my colleague Mary Connor for the term “nothing-based economy.”

Mary’s source used it to describe (I think) an economy that is all image and perception—in a word, “branding.” I’d extend the term to describe an economy based not on creating tangible goods and useful services that can benefit people and enrich their lives (in both senses of “enrich”), but one in which wealth largely involves a small group of people shifting intangible assets around for their own renumerative benefit. Take mortgage-backed securities, please.

(You can extend it even further to spending on things like knickknacks, celebrities, diet products, and (at the “upscale” end) various types of interior décor items that cost a lot but don’t really add much to one’s life. All of which can be categorized simply as “worthless crap that briefly makes you feel good.”)

The best critique of the nothing-based economy that I’ve seen comes from Steve Randy Waldman, from his blog Interfluidity. (Warning: It’s somewhat economo-geeky. Stick with it and you’ll be rewarded. The comments are worthy, too.)

Here’s the abridged version of Waldman’s analysis. The U.S. economy is currently built primarily on consumption, not useful production. Thrift is not being rewarded because for most of us, saving and investment don’t seem to be paying off. We aren’t doing better than our parents. Often, we’re not even doing as well.

Meanwhile, the U.S. financial system, which is supposed to be investing in future wealth, is instead generating and skimming off froth:

Our financial system is failing spectacularly because it erred grievously. It built homes and roads and sewers that oughtn't have been built, it "invested" in vacations and plasma televisions, and it paid itself handsomely for doing so. That's not a problem we can spend our way out of. To fix the financial system we have to change it, not rally to its support. We will know we've put things right when thrift is something we can celebrate . . .

We can overstate all this. For all of the outsourcing and global supply chains, it’s not as if we’re not making anything worthwhile in the U.S. In Minnesota, we only have to look around at many med-tech businesses and specialty manufacturers that are sending truly useful products across the country and around the world.

But if our economy is to truly grow—and grow for everyone—our financial system needs to invest less in toys (physical or financial) and more in capital-intensive but ultimately more productive uses.

Your blogger’s own choice: high-speed cross-country trains, with locomotives using more electricity than diesel fuel. Though air travel will certain never disappear, its limitations are becoming clear. But high-speed trains, which have worked so well elsewhere in the world—that would really be something.

Pricey Whine

For the record, I do not think we’re “a nation of whiners.” And I do think it pretty rich for a very wealthy, powerful banker to shake his critical finger at people having trouble keeping up with inflation and paying their skyrocketing health-care and property-tax bills. Suck it up, lower orders! I am!

(Phil Gramm’s outburst recalls the caption of a 1964 cartoon showing presidential candidate and retail heir Barry Goldwater looking irritably at a group of beggars: “If you people had any initiative, you’d go out and inherit a department store!”)

That said, how bad off are we? Inflation, resetting ARMs, and lost employment aren’t exactly the stuff of champagne and roses. Still, based on statistics and anecdotal evidence, it seems pretty clear that we’ve over-consumed—too-big houses, too-big gas-gulping vehicles, too-big TVs, too much worthless crap. (And maybe too many Baconators!) Now we’re paying for it—or trying to.

In other words, most of us aren’t suffering as badly as we think. Or if we are, it’s because we didn’t do what grownups are supposed to do: be thrifty, save money, don’t let our eyes get bigger than our stomachs.

Wage inequality has certainly increased over the past few decades. The reasons for this remain a matter of debate. But even this may not be as problematic as some populistic types have asserted. It could largely be a matter of the different ways different demographics spend their money.

Don’t get me wrong. We still need to better regulate a financial industry (or at least sectors of that industry) that has privatized profits and socialized losses. The long-term economic security of this country requires it. Reforming consumer-screwing credit-card practices and perhaps even doing away with the regressive, employment-slowing payroll tax are also overdue.

But except for a few of us, we’ve no reason to believe it’s all their fault.

What’s the Matter with Main Street?

Given all the (often self-inflated) celebration of the blogosphere, it’s remarkable how much the print media remains the chief touchstone and springboard of its most interesting debates and discussions. (Take a certain recent New Yorker cover, for instance.)

Consider a couple of particularly provocative newspaper pieces over the weekend.

In Saturday’s Wall Street Journal, financial commentator Paul Grant wonders why Main Street isn’t more P.O.’d about the bailout of Bear Stearns, the Fannie/Freddie debacle, and the mortgage mess—the costs of which will be borne primarily by the average taxpayers, while a great many well-to-do financial players will remain well-to-do.

So where is the outrage?

There is some, but it’s not well organized. Americans haven’t done group outrage for a long time. Call it a “silent majority” thing. In Freedom of Fear, his Pulitzer Prize–winning history of the U.S. during the Depression and World War II, David Kennedy notes that despite the images of union strikers and other protesters, the vast majority of Americans during the Depression were far from a revolutionary class. Beaten down? Perhaps. Overly optimistic that prosperity was just around the corner? Maybe that, too.

In any case, Americans as a whole don’t seem to make particularly good populists anymore. They simply don’t tend to see banks and business in general as the enemy. In fact, thanks to 401(k)s and other similar products, we’re more tied to the financial system for our well-being than ever.

Perhaps another reason why we aren’t as mad as hell: The out-of-pocket costs are, so far, hidden from us. At least our income taxes haven’t gone up!

The other article, which appeared in the Sunday New York Times, tells the story of one consumer-debt-burdened individual and how she went from solid financial citizen to harassed and stressed-out debtor. An excellent commentary on the article is this post about the article from the estimable housing-industry blog Calculated Risk.

The key question that the article and the post wrestle with: Who’s responsible for these debts—the spendthrift debtor or the incautious lender? It’s not as simple as it seems.

In the good ol’ days, credit card companies and other lenders didn’t lend out to people who weren’t likely to pay back. Now, as one Calculated Risk commenter notes: “Lenders are lending out MORE THAN THE PERSON HAS THE ABILITY TO REPAY. And they are doing it at huge profit...until they aren't. And then we as taxpayers have to swoop in and save the day.”

In the current crisis, we’re all a part of the problem. Maybe that’s why, so far at least, we’re fretting more than complaining. But when we start paying while others walk away with millions, things will change.

Maybe.

Resting on our Rust?

“People [living in this state] seem to be content to be mediocre people living in mediocre cities.”

The economic analyst quoted here is talking about Indiana, not Minnesota. It’s a harsh assessment, and probably more than a little broad of brush. But is there something to it? And could that something be extended to the entire Midwest?

The quotation appears in Caught in the Middle: America's Heartland in the Age of Globalism, by former Chicago Tribune journalist (and small-town Iowa native) Richard C. Longworth. As I commanded in my last post, anyone who cares about the Midwest’s economic future should read this book. This isn’t to say that the book’s points aren’t subject to debate, of course. But you’d be right to say that the Midwest’s economic future depends on such a debate.

Longworth’s overarching idea is, simply stated, that the Midwest is living in the past. The Midwest’s two great industries—heavy manufacturing and agriculture—flourished in the postwar era. But starting in the ’70s, those two industry clusters went into decline. The old steel mills are mostly gone, and the Big Three automakers are famously shrinking, taking their Midwestern suppliers down with them.

And while farming has come back reasonably well (especially now, with high commodity prices), it’s now dominated by “megafarms” and giant agribusiness concerns like Cargill and ADM. Small niche farms providing, say, cheese and organic produce are generally doing fine. Midsize farmers? All but gone.

So how are Midwest states responding? Mostly by longing for the good old days—demanding protectionist trade measures, most notably. But that nostalgia is expressed in other ways, Longworth asserts: a “traditional values” mentality that’s suspicious of immigrants and graduate-degreed know-what’s-besters, as well as an indifference to education. Dad needed only a diploma to get a job at the plant—that’s good enough for me.

I’m going to offer some of my responses to Caught in the Middle in later posts. Read the book and offer your own.

“Mediocre,” by the way, comes from the Latin word medius, meaning “middle.” The book asserts that if Midwesterners settle for the middle, the global economy will fly over and pass it by. And that’s already happening.

More to come.