Dodging the Next Bubble
by Bruce Fisher
Reagan redux or Keynes ahead?
Sleek new trains engineered and built right here in the USA. Whirring windmills and other carbon-neutral energy innovations powering our endeavors. Ever-quicker information-sharing networks. More freshly minted post-doctoral fellows at work in our institutes and clinics busily making medicine and healthcare both smarter and cheaper. And of course, all those 20-somethings with laptops full o’ code, working it early and working it late, eschewing beer for coffee in the hunt for the “blear-eyed wisdom out of midnight oil” that William Butler Yeats smiled at a century ago.
These are the longed-for tools of contentment which, if our leaders would only invest our tax dollars prudently, could get us a new American Century.
So says a new crop of progressive economists who would like us to leave behind the bubble-producing FIRE economy and move ahead into the new TECI economy. Over-reliance on finance, insurance, and real estate got America and the world into huge trouble in 2008. A new focus on next-generation transportation, energy, and communications infrastructure (thus TECI) could transform us from financial speculators into industrial producers once again.
That, sadly, isn’t happening. Instead, we are witnessing Barack Obama’s version of the Ronald Reagan-George W. Bush policy array unfold. As progressives ruefully note, Bush’s tax-rate regime is intact because of Obama’s unilateral November armistice day. Retailers worry that the incremental recovery that has reduced unemployment to nine percent (remember that in the 1950s, 1960s, and 1970s, the top unemployment rate was around five percent) is probably going to get stymied, with unemployment going back up to last year’s 10+ percent, because state and local governments are already laying off more teachers, social workers, plow-truck drivers, environmental-compliance officers, and other public workers in the name of “austerity.” Progressives aplenty still hope for a re-regulation of Wall Street, and a reversal of Bill Clinton’s completion of the Reagan rebellion against financial regulation, but hope wanes with the new Republican majority in the House of Representatives. Environmentalists wince when Obama speaks to the US Chamber of Commerce because their progressive president mouths the very phrases, the very Chamber-engineered language, to wit: environmental regulations impede commerce. Morgan Stanley’s Bill Daley is running the White House staff now. Carol Browner, who held the climate-change portfolio, is no longer in the Obama administration. In the run-up to the 2008 election, much intellectual verve was loosed, most of it research-driven, fact-based, and policy-wonked, and its smartest advocates felt they had a champion in the person of the new president on pretty much every issue dear to the progressive conscience.
At the moment, those folks are feeling something worse than stymied. That’s because the 2010 elections gave us a Congress that has already tried to roll back Obama’s incremental healthcare reform, that will suffocate Obama’s climate-change legislation, and that will try to cut even more investment initiatives than Obama’s own new White House staff has already decided to shrink or eliminate. Even signature Obama initiatives, including the Great Lakes Restoration project (which will still exist), will lose 25 percent or more of their funding. High-speed rail is being strangled in Ohio and Wisconsin by new Republican governors, while China and Europe muscle ahead with hundreds and hundreds of new miles of high-tech, energy-efficient rail lines. Worst of all, though, is that the serious financial regulatory reform that many analysts called for never even made it to Congress.
So the chances for the policy mix prescribed by progressives is quite a bit slimmer than it was two years ago. Yet there’s no more urgent moment than now, argues Eric Janszen, whose brief, smart new book is The Postcatastrophe Economy: Rebuilding America and Avoiding the Next Bubble.
“By adopting an impractical, fundamentalist, laissez-faire ideology in the 1980s, the United States ceded economic and energy policy to investment banks,” writes Janszen. He wrote those words many months before Americans were treated to all the observances of Ronald Reagan’s 100th birthday last week. The politician most responsible for having created the FIRE economy has been celebrated as a savior, even as the collapse of that economy leaves our country swimming in debt, polarized between rich and poor as never before, and stuck with “one of the world’s most inefficient transportation systems” because Reagan set us on a 30-year-long “joyride on an ocean of cheap oil.” Janszen predicts that “[n]o crisis will be more dire, and exert economic pain less evenly, than the onset of permanently high and rising oil prices that act like a regressive tax that consumes an ever-greater portion of the incomes of the lowest-earning households.” The Reagan anniversary, celebrated loudest by those who want government to keep subsidizing the FIRE economy but not to build any high-speed trains, overshadowed the 75th anniversary of John Maynard Keynes’s influential theory about what role government absolutely has to have in stepping in when markets screw up. Keynes’s most astute student was an American president named Franklin D. Roosevelt, who took the occasion of the Depression to do some long-term economic stimulus that created wealth-producing infrastructure of the kind Janszen calls for. Roosevelt’s successors did the same thing: Harry Truman’s GI Bill spending created human capital as never before by sending vets to college. Dwight D. Eisenhower’s Keynesian stimulus was the interstate highway system. John F. Kennedy’s was NASA, Lyndon Johnson’s the Great Society. Even Richard Nixon, who glowered when he said, “We’re all Keynesians now,” spent heavily on infrastructure, science, health, and technology; It was Nixon who launched the “war on cancer” with unprecedented grants for research. But Reagan, though he spent like a Keynesian, changed the language, spawning Ron Paul, the new deficit-mania, and the bellicose, anti-public rhetoric of Palinism.
If Reagan is the icon of orthodox, let-the-market-fix-it politics, Keynes’s 75-year-old advice on how to fix broken economies is the playbook still cited by all those who notice that government always has a role in economic events. Always has, always will.
But the policy choice matters, and so do the local versions of national policies. If the federal government spends while states cut, the federal thrust is blunted. Then there are the hangovers that we’re stuck with even many mornings after. Here in New York State, we see that the Obama administration still leaves crazy, economically destructive legacies of the Bush administration cranking along. For example, critics of the Seneca-owned casino in downtown Buffalo have to face the fact that the Obama administration has done precisely nothing to reverse the Inauguration Day decision by George W. Bush’s Interior Department appointees to leave the Michigan Street, off-reservation casino operating despite a pretty unequivocal ruling by a federal judge that doing so breaks federal law. A new study forthcoming from a Niagara University researcher quantifies the economic harm caused by the Niagara Falls casino, which lures and holds gamblers by giving free meals and free hotel nights, thus killing any restaurant and hotel competition for miles around. Try selling steaks, chops, and nights when the people down the way are giving it away. If your restaurant is short of business or your hotel can only fill up if you slash overnight rates to zero, then thank President Obama and our Congressional delegation for a government intervention that clearly hurts the regional economy.
Could better policies be in the offing? Could subsidies for the FIRE economy be ending, and smart investment in transportation, technology and energy be on the way? So far, there hasn’t been any change in state economic development policy. Governor Andrew Cuomo has just appointed new leadership at the Empire State Development Corporation, which has a legacy project underway here in Buffalo. Before Cuomo took office, the authorities he now rules approved plans to invest $153 million into replica canals and retail and commercial space in Erie Canal Harbor as if the go-go, pre-2008-crash days of ever-expanding commercial real estate and retail are here again. (Hint: Janszen and others point out that all that consumption, and all that real-estate speculation, was done on borrowed money—which consumers are, um, rather short on now.) As it stands, carried-over state economic development policy could result in a newly built, 700,000-square-foot office complex, built with taxpayer dollars, that would empty out the HSBC tower, creating a sudden glut on an already glutted downtown market.
Federal policy gives us a job-killing casino. State policy could give us a death star for downtown real estate.
Clearly, if we’re going to move from the FIRE economy to the TECI economy, we’ll need more dissident voices to leave their websites and enter the precincts of the policy-makers.
The encouraging news is that more of those dissident voices seem to be cracking through the sound-barrier erected by the major media, which still give mainstream economists—including Barack Obama’s FIRE-focused advisors—daily access to all of us.
What’s disturbing about Janszen having been so right for so long is that his optimism seems rather forced. Getting from where we are to a TECI economy will take a political transition that looks faraway. Obama’s tactical retreat on taxes, like his courting of the leading voices of the business establishment, leaves the features of the FIRE economy untouched. Maybe the investment bankers who fund political campaigns will be like the progressive organizers who organized the grassroots for Obama: Maybe neither of these groups will have anyplace else to go in 2012 than with the president who once promised high-speed rail, clean-energy technology, re-regulation of Wall Street, and new investment in American industry simply because the alternative is untenable. One can only hope that Obama co-opts the folks who fund the anti-Keynesians, for after reading Janszen, it’s pretty obvious that a return to Reaganism and the full force of the FIRE economy will only make the world ill again.
Meanwhile, oil prices today wend their way ever-upward just as Janszen explained they would. Market forces (i.e., the increasing cost of fuel) may help re-introduce the inherent sensibleness of energy-efficient transportation alternatives to a country that lurches to and fro on trains. This is no time for progressives, policy wonks, and people who can count higher than 21 to stop working on what has to come next. But there’s political prep-work to be done too: Blue Dog Democrats are as useless to this future as are Reagan revivalists.