The shocking thing about the financial collapse of 2008 is not that Wall Street excesses pushed us into the worst economy crisis since the Depression. It's that the same financial system has been propped back up and that elites are getting richer than ever, while the effects of that collapse are continuing to sandbag the rest of the economy. Oh, and most of this aftermath happened while a Democrat was in the White House.
- The biggest banks are bigger and more concentrated than ever.
- Subprime (subprime!) is making a comeback with interest rates of 8 to 13 percent.
- Despite Michael Lewis's devastating expose of how high speed trading is nothing but a technological scam that allows insiders to profit at the expense of small investors, regulators are not moving to abolish it.
- The usual suspects are declaring the housing crisis over, even though default and foreclosure rates in the hardest hit cities and states are upwards of 25 percent.
- The deficit is falling, now just 2.8 percent of GDP, thanks to massive cuts in social spending. Isn't that reassuring?
Meanwhile, back in the real economy, good jobs are far too scarce, incomes are stagnant, while 95 percent of the gains go to the top one percent.
Last month, President Barack Obama belatedly decided that the global climate crisis necessitated action to reduce carbon emission caused by coal. He authorized the EPA to issue draft regulations requiring utilities to cut carbon dioxide emissions from existing coal plants by up to 30 percent by 2030.
With climate change and coal's inherent dirtiness not exactly state secrets, I wondered why the president had waited until a difficult election year, when Democrats in coal states face difficult elections. But Obama's unerring sense of timing is a subject for another day. And these proposed regulations, though an improvement, only scratch the surface of what needs to be done.
The thought occurred: Wouldn't the economic dislocations of a serious effort on climate change be more bearable if the economy were at full employment?
And also: What would it take to finally get us out of the aftermath of the financial collapse?
The answer is pretty straightforward: We need massive public investment in both basic infrastructure and in a transition to a sustainable economy.
We need to finance all of that partially by larger deficits—which will be recovered by improved economy performance—and partially by higher taxes on those billionaires whose activities cause financial collapses.
The right order of magnitude is something like $200-$300 billion dollars a year, for ten years. Not an abbreviated, "timely, targeted and temporary" stimulus like the one Obama sponsored at the pit of the recession, but an ongoing program of economic renewal.
Such a program would create good jobs, incubate domestic technologies, restore rotting infrastructure, make American more resilient in the face of sea level rise, and make the economy more productive and competitive. What's not to like?
Well, if you are the top one percent, obsessing over budget deficits, protecting your financial model and fighting anything that smacks of a tax increase, there is plenty not to like.
And if you wonder why so many Democrats are too timid to pose a robust recovery program for regular people, financed by the very wealthy, the Wall Street connection provides much of the answer.
It's curious: The administration is willing to take on coal states and coal miners, but not bankers. Actually, the number of people making a living from working in coal mines is only about one tenth of what it was at its peak. It's not carbon control that killed those jobs, but automation.
In coal country, that brand of automation destroys mountains, leaves massive open pits, and polluted rivers. The coal companies make more money than ever.
Wouldn't it be useful if public investment could provide decent jobs for people who'd rather not work in mines, and reclaim ruined landscapes and rivers along the way?
Public investment is also the best answer to the latest automation scare. The economy keeps getting richer, but the mix of jobs keeps changing as technology replaces human workers. A public investment program can make that ongoing transition easier to bear.
Isn't this all just utopian? Not at all. As I recently wrote in The American Prospect, we've done this exercise before.
Twelve years after the Great Depression, when the aftereffects of the collapse of 1929 were still sandbagging the real economy, we finally blasted back to recovery with all of the spending from World War II.
We financed it partly by surtaxes on the rich, partly by deficits. And just for good measure, we put the financial economy back in its box, where it usefully stayed for more than three prosperous decades.
The war was, first, a massive macroeconomic stimulus. Unemployment was still more than 14 percent in 1940. Thanks to more than $100 billion of war-production orders in the first six months of 1942—more than the entire gross domestic product of 1939—joblessness vanished. The war also recapitalized industry that had languished during the Great Depression, and it gave government a central place in developing science and technology. The war was not just a huge jobs program but an unprecedented job-training program. President Franklin Roosevelt also chose to use war production to increase the power of unions as full social partners. A company that wanted defense contracts had to recognize its unions. So the war transformed labor markets.
Second, the war altered incomes. Steeply progressive income taxes with marginal rates as high as 94 percent, limits on executive compensation, and strict controls on the bond market led to a compression of the income distribution that lasted more than a quarter-century. The need to finance the war led to emergency measures pegging the rate on government bonds at a maximum of 2.5 percent. The Federal Reserve simply bought whatever quantity of bonds the war effort required. This meant that a major category of financial industry profit -- buying, selling, and speculating in Treasury bonds -- was eliminated, at the expense of the rentier class. Economists even have a name for this process: repression of finance. We could use some of that today.
A side effect of the Good War was enhanced social solidarity, which in turn reinforced political support for egalitarian policies.
We could do all of this again, without the war, and spend the money in a serious green transition that would put people back to work at good jobs.
All that's missing is the politics.