Threshold: The Crisis of Western Culture

Chapter 2 -- The Coup of the Elites

Threshold was published in 2009 by Viking/Penguin and is now out of print (although used copies are available on the ‘net). Each Sunday I’ll publish another chapter until the entire book is here.

Chapter 2

The Economy

Some men rob you with a six-gun—others rob you with a fountain pen.

—Woody Guthrie

The Coup of the Elites

The election of 1992 pitted Bill Clinton against George H. W. Bush. While Bush was running as a conservative who was compassionate enough to hope for “a thousand points of [privatized nongovernmental] light,” Clinton campaigned as an unabashed FDR believing-in-government-as-a-solution liberal. In language reminiscent of Teddy Roosevelt’s progressive “Square Deal” and FDR’s progressive “New Deal,” Clinton proposed a “New Covenant” between the U.S. government and U.S. citizens. In a speech at Georgetown University on October 23, 1991, he declared:

“We’ve got to rebuild our political life before the demagogues and the racists and those who pander to the worst in us bring this country down. People once looked at the President and the Congress to bring us together, to solve problems, to make progress. Now, in the face of massive challenges, our government stands discredited, our people are disillusioned. There’s a hole in our politics where our sense of common purpose used to be …

“To turn America around, we’ve got to have a new approach, founded on our most sacred principles as a nation, with a vision for the future. We need a new covenant, a solemn agreement between the people and their government to provide opportunity for everybody, inspire responsibility throughout our society, and restore a sense of community to our great nation—a new covenant to take government back from the powerful interests and the bureaucracy, and give it back to the ordinary people of our country.

“More than 200 years ago, our founding fathers outlined our first social compact, between government and the people, not just between Lords and Kings. More than a hundred years ago, Abraham Lincoln gave his life to maintain the union that compact created. More than 60 years ago, Franklin Roosevelt renewed that promise with a New Deal that offered opportunity in return for hard work.

“Today we need to forge a new covenant that will repair the damaged bond between the people and their government, restore our basic values, embed the idea that a country has the responsibility to help people get ahead, but that citizens have not only the right, but the responsibility to rise as far and fast as their talents and determination can take them. And most important of all, that we’re all in this together. We have to make good on the words of Thomas Jefferson who once said, “A debt of service is due from every man to his country proportional to the bounties which nature and fortune have measured to him.”

Americans loved it. A majority of voters in 1992 were old enough to remember what America was like under the 1940–1981 New Deal era, when a single worker with a good job had health care, a pension, and could raise a family and buy a home; when the GI Bill educated millions; when hospitals and health insurance companies in nearly every state were required by law to be not-for-profit organizations, and health care was inexpensive and widely available.

And they noticed that the twelve years of Reagan and Bush had begun the process of shattering that historic era; that the middle class was slipping away; that government had become remote and hostile rather than protecting the rights of workers and the middle class.

Americans elected Clinton based on his FDR-style rhetoric. They were looking forward to a return to the golden age of America’s middle class. They were ready for the New Covenant, and apparently so was Bill Clinton—there is every sign that he actually believed his own rhetoric. On all this, he won the election in November, and spent that month and December preparing his New Covenant programs to restore the American middle class.

Until January.

As Adam Curtis brilliantly points out in a special documentary series he did for the BBC titled The Trap, a few weeks before Bill Clinton was to be sworn into office as president of the United States, he was visited by Goldman, Sachs CEO Robert Rubin (who had just taken a $40 million paycheck for his last year with Goldman, and would soon become the head of Clinton’s economic team tasked with carrying out the “New Covenant”) and Alan Greenspan.

The philosophy represented by Rubin and Greenspan doesn’t believe in government as a solution to much of anything other than wars and crime. As true classical conservatives in the mold of Sir Edmund Burke and Thomas Hobbes, many modern Libertarians and neoliberals don’t even believe in democracy (as any Libertarian will honestly admit, they call it “the tyranny of the majority”).

Instead, because they believe in the inherently evil nature of most humans, they held that a small ruling elite of “good people,” the “wise ones,” must concentrate wealth and power (the first fuels the second, by and large) in a small number of hands, out of the reach of what the first American conservative president John Adams called “the rabble” (us!).

They believed that social stability was more important than social mobility. As of this writing, in 2008, the surest way to become wealthy in the United States or Britain is to be born to wealthy parents; the surest way to be poor is to have poor parents. Social mobility—the ability to move between classes, for better or worse (depending on merit, in part)—has been rolled back from its highly fluid levels in the 1940–1980 years to a rigidity last measured in the 1920s as America was sliding into the Republican Great Depression (the United States is now, as a result of their policies, the least socially mobile—that is, creating conditions in which a poor person can become wealthy—of all industrialized countries in the world)

They believed that too much power and wealth in the hands of the middle class would lead to instability (they pointed to the riots and uprisings of the 1960s and 1970s—the time when the middle class was at its strongest since the 1770s, and a time of “revolution of the rabble”), and that, as Alan Greenspan frankly told The Wall Street Journal in 1989, his job as Fed chairman was to maintain a certain minimum level of “worker insecurity” so there wouldn’t be “wage inflation”—income increases among the middle class.[xiv]

Greenspan had been initiated into Ayn Rand’s cult of objectivism in her apartment in New York in the 1950s—he even brought a six-foot-tall dollar sign–shaped wreath of flowers to her funeral—and Rubin was a dyed-in-the-wool neoliberal. Both believed that economies were so complex that they’d operate at maximum efficiency only if government stayed as far away from them as possible. Both believed that the traditional regulators of economies—empowered labor and high marginal tax rates for corporations and the very rich—were no longer necessary. Both believed in the Milton Friedman “Chicago School” theories that are today often referred to as “conservative economics,” “neoliberalism,” or “Reaganomics.”

Governments, they told Clinton, would be replaced by economies made up largely of corporations operating outside the realm of government control. Money (capital) would be free to move anywhere in the world, although the movement of people (labor) would continue to be tightly restricted to maximize the potential for profit in any particular geographic part of the new worldwide marketplace. The idea of a nation as a sovereign entity answerable to its people was, in their view, quaint and outdated. People (and nations) existed, they believed, to serve economic forces, not the other way around.

Walter B. Wriston, the head of CitiCorp, the world’s largest bank at the time, had just published a book, with the unambiguous title The Twilight of Sovereignty, that laid this idea out explicitly. As noted in Curtis’s documentary, Wriston wrote, “Markets are the only true voting machines. If they are left untouched by politicians and regulation, they will truly come to act out the people’s will for the first time in modern history.”

In 1929, on the eve of the first Republican Great Depression, the top one tenth of 1 percent (0.1 percent) of the U.S. population—a total of about one hundred thousand people—received almost 9 percent of all U.S. income. The same was true of the United Kingdom and France. [xv] The top 1 percent of Americans held 49 percent of all wealth.

While the Republican Great Depression decreased both the wealth and income numbers slightly, those numbers really began to collapse for the ultra-rich and increase for the middle class when Franklin D. Roosevelt put in place his New Deal through the late 1930s and early 1940s, particularly with the introduction of a top income tax rate of 91 percent on every dollar earned over roughly $3.2 million in today’s dollars. The income flowing to the top one tenth of 1 percent (0.1 percent) of American wage earners had crashed by almost two thirds, down to just over 3.0 percent by 1943, and by the 1950s, as Dwight D. Eisenhower kept in place Roosevelt’s policies, down to just over 2.0 percent, where it stayed until around 1980, when Reagan slashed taxes on the ultra-rich. By the late 1970s the share of the nation’s wealth owned by the top 1 percent of asset holders had fallen in the United States from almost 50 percent in 1929 to a low of around 25 percent—money that had moved into the hands of the middle class, who could now raise a family and buy a home on a single income.

Similar postwar progressive economic policies in the United Kingdom and France caused those two nation’s elites to “suffer” similarly.

And while in France, to this day, the elite 0.1 percent still earns only 2.0 percent of national wealth, the elites of the United States and the United Kingdom decided to fight back, staging a coup in the late 1970s and early 1980s. A result is that today the top 0.1 percent of U.S. wage earners are back up over 6 percent—a 100 percent increase over the 1940–1980 New Deal era—and the wealth owned by the top 1 percent is now back up over 50 percent.

Like all coups, it was planned before it happened. And like all successful coups, it depended heavily on changing the thinking of the people of the two nations so that the coup would be largely supported by the average person (and voter). The idea of the “free market” as the ultimate democracy was seductively simple, and the average person didn’t have enough economics training to know that there’s no such thing as a “free” market—all markets (outside of individual barter) are the result of society and government creating them through a complex web of laws, rules, systems for enforcement (courts and jails), and a reliable mechanism for exchanging value (currency and banks).

It’s a coup that most Americans and Britons don’t even know happened, although citizens are often baffled when they look at today’s French—where the elites were not able to pull off the coup—and see in France a strong middle class, one of the world’s best healthcare systems, free college education, and a more equitable distribution of both wealth and income. (Although, with the election of neoliberal Nicolas Sarkosy, the coup is now under way in France, too.)

This was a coup of ideas, the primary one being that small-d democracy—a sovereign government of, by, and for The People—is a quaint and outmoded idea. “Citizenship” is dangerous in this worldview; it leads to nationalism and conflict. Instead, if everybody in the world is redefined as a “consumer,” and all “decisions” are made by “the market” and its arbiters, transnational corporations, then the world will eventually live in peace, harmony, and stability.

Businessmen are no longer “robber barons” or “greedy capitalists” or “in need of regulation.” Instead, they are near-divine channelers of the ultimate transcendent truth of the “free marketplace.” Because they sit astride the Most Powerful Force in the World—the “free market”—it’s entirely appropriate that they take home hundreds of millions of dollars a year, live in palaces and mansions, and travel in their private jets well separated from the rabble.

The economic crisis in which we now find ourselves mired has forced our nation to confront the threshold between those who are barely making it, who work for a living, who are one paycheck or one illness away from disaster (and, thus, hard to call “free”), and those who own so much wealth that they and their families for generations will live comfortably, control massive political power, and remain insulated in a world of gated communities, private jets, limousines, and on-call doctors. Where along the way did we start telling ourselves that this was how things should be? What is it about American culture that permits such rampant corruption and gives it such a beautiful face?

The Free Market Myth

The fundamental myth of the Milton/Thomas Friedman neoliberal cons is that in a “flat world” everybody is not only able to compete with everybody else freely, but should be required to. It sounds nice. America trades with—and competes with trade with and for—the European Union. France against Germany. England against Australia.

But wait a minute. In such a “free” trade competition, who will win when the match-up is Canada versus the Solomon Islands? Germany versus Bulgaria? Zimbabwe versus Italy?

There are two glaringly obvious flaws in the so-called free trade theories expounded by neoliberal philosophers such as Friedrich Von Hayek and Milton Friedman, and promoted relentlessly in the popular press by hucksters such as Thomas Friedman.

First, “infant” economies—countries that are only beginning to get on their feet in terms of trade—cannot compete with “mature” economies. They really have only two choices—lose to their more mature competitors and stand on the hungry and cold outer banks of the world of trade (as we see with much of Africa), or be colonized and exploited by the dominant corporate forces within the mature economies (as we see with Shell Oil and Nigeria, or historically with the “banana republics” of Central and South America and Asia and, literally, the banana corporations).

Second, the way “infant” economies become “mature” economies is not via free trade. Whether it be the mature economies of Britain (which seriously began to grow in the early 1600s), America (late 1700s), Japan (1800s), or Brazil (1900s), in every single case, worldwide, without exception, the economic strength and maturity of a nation came about as a result not of governments “standing aside” or “getting out of the way” but, instead, of direct government participation in and protection of the “infant” industries and economy.

The modern history of protectionist trade policies goes back to ancient Rome, stretches through the reigns of a series of King Henrys in the United Kingdom, through Alexander Hamilton’s tenure as secretary of the treasury under George Washington, through the trade policies of Dwight D. Eisenhower and JFK, and continues today with China, Korea, the Middle East, and the rapidly growing Brazilian economy.

The way economies go from being underdeveloped, anemic, and uncompetitive to becoming developed, strong, and aggressively competitive is simple and straightforward: government steps in.

Government first determines which industries are worth growing and which are not. Having a strong machine-tool industry in the United States both creates good jobs and is in our strategic interest—machine tools are necessary for virtually every other form of heavy manufacturing (and even light, sophisticated electronics fabrication), and for them, being dependent on Italy or China or Japan is crazy. On the other hand, do we really need to spend the resources of We the People to encourage and grow a sandalwood-carving industry (actually a substantial industry in Thailand) when we neither grow sandalwood nor have a long and historic tradition of carving it into both artistic and utilitarian forms?

Once “strategic” and “important” industries are identified, government both encourages and protects their domestic growth in a variety of ways. These include subsidies, legal protections (such as patent laws), import tariffs to guard against foreign competition, strong industry regulation to ensure quality, and development of infrastructure to ease manufacture, distribution, sales, and use of the product.

As Ha-Joon Chang points out in his brilliant book Bad Samaritans: The Myth of Free Trade and the Secret History of Capitalism,[xvi] in 1933 an Asian clothing manufacturing company decided to branch out into the manufacture of automobiles. They had everything going against them—their nation had no really serious domestic auto industry, the company had no experience with the product, and other nations (particularly the United States and Great Britain) were already making world-class vehicles that had captured most of the global markets.

But the company caught the imagination of its country’s leadership, and a Ministry of Trade decided to help it along. Government subsidies helped the company develop itsfirst car. Decades of high import tariffs protected it from foreign competition as it grew into a serious contender. Domestic content laws both ensured that the company used parts made within the country, and guaranteed that domestic competitors did as well, thus building a strong base of domestic companies supportive of an auto industry, from tires to plastic components to precision machine tools and electronics.

In 1939 the country even kicked out both GM and Ford from sales within the country, and bailed out the struggling textile manufacturer as it moved relentlessly forward in the development of an automobile.

That company was originally known as the Toyoda Automatic Loom Company, is today known as Toyota, and manufactures the infamous Lexus that Tom Friedman mistakenly thought was successful because the world is “flat” and trade is “free.” In fact, the success of the Lexus (and the Prius and every other Toyota) is entirely traceable to massive government intervention in the markets and protection of domestic industries by the government of Japan over a fifty-year period, intervention and protection that continue to this very day.

Somehow this is lost on the whole “free trade” bunch. History proves the free-traders wrong. Every time, without exception, when a developing nation is forced (usually by the International Monetary Fund, World Trade Organization, and/or the World Bank) to unilaterally throw open all their doors to “free trade,” the result is a disaster. Local industries still in their developmental stages are either wiped out or bought out and shut down by foreign behemoths. Wages collapse. The “middle class” becomes the working poor, as we’ve seen in Argentina, Chile, Mexico, and in some respects, most recently, the United States of America. And in the process, the largest corporations and wealthiest individuals in the world become larger, stronger, and wealthier. It’s the game Monopoly on steroids.

Even worse, opening a country up to “free trade” weakens its democratic institutions. Because the role of government is diminished—and in a democratic republic, “government” is another word for “the will of the people”—the voice of citizens in the nation’s present and future economy is gagged, replaced by the bullhorn of transnational corporations and think tanks funded by grants from mind-bogglingly wealthy families. “One man, one vote” is replaced by “one dollar, one vote.” Governments are corrupted, often beyond immediate recovery, and democracy gives way to a form of oligarchy that is most rightly described as a corporate plutocratic kleptocracy.

When this corporate oligarchy reaches out to take over and merge itself with the powers and institutions of government, it becomes the very definition of Mussolini’s “fascism”: the merger of corporate and state interests. As China has proven, capitalism can do very well, thank you, in the absence of democracy. (You’d think we would have figured that out after having watched Germany in the 1930s, when fascism replaced democracy but capitalism blossomed and the economy grew rapidly.) And as so many of the Northern European countries show so clearly, capitalism can flourish and generate great wealth and a high standard of living within the constraints of intense regulation by a democratic republic answerable entirely to its citizens.

Consider the United States of America.

In the earliest days of our nation, George Washington’s secretary of the treasury, Alexander Hamilton, with some writing and editing help from his friend and sometime assistant Tench Coxe, outlined what came to be the foundation of American industrial policy. At its core was the protection of what Hamilton referred to as “infant” industries:

Bounties [subsidies] are sometimes not only the best, but the only proper expedient, for uniting the encouragement of a new object of agriculture, with that of a new object of manufacture. It is the interest of the farmer to have the production of the raw material promoted, by counteracting the interference of the foreign material of the same kind. It is the interest of the manufacturer to have the material abundant and cheap … By either destroying the requisite supply, or raising the price of the article, beyond what can be afforded to be given for it, by the conductor of an infant manufacture, it is abandoned or fails;…

It cannot escape notice, that a duty upon the importation of an article can no otherwise aid the domestic production of it, than giving the latter greater advantages in the home market.

Hamilton’s point was that there are two things needed for an “infant industry” to turn into a genuine manufacturing power. The first was cheap raw materials; the second, protection from foreign competition.

To provide the cheap raw materials—for example, cotton or wool, if we are talking about the manufacture of clothing—Hamilton suggested both short-term subsidies for the production of the raw material, and tariffs (import taxes) on cotton or wool brought in from overseas. This would both provide a sure and inexpensive supply of raw material, and ensure that the raw materials were—and would continue to be over the long term—produced here at home.

To protect the nascent clothing industry (in this example), Hamilton also strongly advocated short-term supports to the budding industries (e.g., government support or gifts of land for the production of factories) and tariffs on foreign-made clothing. This would make domestic products cheaper for the consumer and foreign ones more expensive, thus encouraging Americans to buy American-made clothing, thus building up a strong domestic fabric and clothing industry.

As Hamilton noted:

“It is a primary object of the policy of nations, to be able to supply themselves with subsistence from their own soils; and manufacturing nations, as far as circumstances permit, endeavor to procure, from the same source, the raw materials necessary for their own fabrics.”

This understanding of the role of government in helping “infant industries” grow to become mature industries capable of international competition was well known by Americans for most of the history of our country. After Hamilton published his “report” during the Washington administration, Congress, at Hamilton’s and Coxe’s urging, raised tariffs on imported finished manufactured products from 5 percent to 12.5 percent. Three presidents and two decades later, Congress doubled those tariffs in response to the War of 1812, when the British and Canadians made their way to Washington, D.C., and set fire to the White House just a few days after President James Madison left to command troops (the only sitting president to do so in our history). The War of 1812 exposed the weakness of our industrial base’s ability to shift to a wartime footing, which led directly to the increase of import tariffs from 12.5 to 22 percent.

As these tariffs made foreign-manufactured goods more expensive and increased demand for domestic-manufactured items, American industry began to take off. Not being idiots, Congress saw this cause and effect and raised tariffs two more times, in 1816 and 1820, to 25 percent and 40 percent, respectively. This set the stage for one of the greatest industrializations in world history—from the 1830s straight up to and through World War II—and also produced the world’s first truly large-scale middle class.

Tariffs are only one part of the equation. As Chang notes, “Between the 1950s and the mid-1990s, US federal government funding accounted for 50–70% of the country’s total [research and development] funding …”. Lacking such assistance, Chang notes, “the US would not have been able to maintain its technological lead over the rest of the world in key industries like computers, semiconductors, life sciences, the internet and aerospace.”

Country by country, region by region, era by era, Chang shows how countries that rose to become industrial or trade superpowers did so only by totally repudiating the Milton Friedman/Thomas Friedman “free trade” and “small government” mythos, and instead following Alexander Hamilton’s tried-and-true formula. Hamilton didn’t invent it—he simply observed what the British had been doing since 1601, when Queen Elizabeth chartered the British East India Company; and she simply observed what the Spanish, Portuguese, and Dutch had been doing for a hundred years before that. And all of them had the example of the Roman and Greek empires, which rose and maintained their economic power by similar Hamiltonian policies.

America held such policies, too, until the 1980s, when Ronald Reagan became president and his economic advisors began advancing the radical libertarian views of Milton Friedman and the (Ayn Rand) objectivist cult views of Alan Greenspan. Driven by an idealistic ideology that said “raw” or “unfettered” (laissez-faire) capitalism would ultimately be superior to democracy, Reagan began his overt push during the Uruguay Round of the General Agreement on Tariffs and Trade (GATT) talks in 1986, suggesting that what was needed was a radical worldwide leveling of tariffs and a reduction in government participation in everything from R-and-D funding to support for higher education. (Reagan had ended the nearly free tuition rates at the University of California while governor of that state.) As the Uruguay Round was about to get under way, Reagan’s speechwriters had him suggest “new and more liberal agreements with our trading partners—agreement under which they would fully open their markets and treat American products as they would treat their own.”

It all would have massively improved the profits of the transnational corporations that were bankrolling Reagan’s candidacy (he was a former TV spokesman for GE), but it condemned the American middle class to increased debt, lower wages, and higher unemployment/underemployment.

George H. W. Bush, initially decrying Reagan’s economic worldview as “voodoo economics,” embraced it, as did Bill Clinton, who really kicked the door down on tariffs and “protectionism” by signing the United States up for the full GATT, the creation of the World Trade Organization (WTO), and the North American Free Trade Agreement (NAFTA), all benefiting the transnational corporations that had come to dominate political contributions for both the Republican and the Democratic parties by the 1980s. Their campaign contributions, in turn, benefited the 537 elected members of the House, Senate, and executive branch of government (president and vice president).

For the first time in its history, our country’s smaller and medium-size industries stood essentially naked and defenseless against those of other fully developed nations, most of which were still holding in place tariffs, R-and-D supports, and intense support of the commons infrastructure, including free higher education and free health care. While today both China and India have import tariffs that average between 20 and 30 percent on manufactured goods (to protect their domestic industries and markets), we’ve dropped our tariffs from a 1973 average of 12 percent to today’s average of around 2 percent.

The result was just what Alexander Hamilton feared: the rapid unraveling of the American middle class as the nation bled its industrial base into the gutter of cheap labor countries.

As wealth dramatically increases in the top 1 percent of America and the middle class shrinks, the working poor become even poorer. Between the election of George W. Bush and 2007, the four hundred richest individuals in America (virtually all associated with transnational corporations) saw their wealth increase from $1.0 trillion to $1.6 trillion—an increase of $600 billion. During that same time the real income of the average wage earner fell by between $2,000 and $4,000 (depending on whose numbers you’re using and whether you include the top 1 percent in the calculations). The top 1 percent of Americans get 90 percent of all income, and own 50 percent of all wealth. This growing edge between the haves and the have-nots has, in the past, brought civilizations to a threshold of cultural, economic, and political change—and often change that’s violent, painful, or even democracy-ending.

On the other hand, the lesson of cultures that have made the transition from the Victorian (and Greenspanian) notion of raw capitalism to a regulated capitalism that benefits both the captains of industry and the working class shows that it’s possible to enhance democracy and freedom while providing a healthy social safety net.