It’s The Stupid Economy
Way back in the fall of 2015, as the Republican nomination for President was heating up, pretenders like Jeb Bush and Chris Christie were touting tax cuts and regulatory rollbacks that they claimed would generate 4% annual economic growth. Trump, ever the egomaniacal self-promoter, responded by claiming his own set of similar proposals would generate 6% growth. Considering that the US hadn’t seen consistent annual growth get anywhere close to 4% since the 2000 recession and the prior 30-year average had been around 2.5%, 6% annual growth was seen as unreasonable. Trump, never one to retreat in the face of reality, doubled down on his 6% growth claim in late 2017 as part of his sales pitch for what turned out to be a massive tax cut for corporations and the ultra-wealthy that did little to juice the investment and growth Trump promised but did juice stock prices by encouraging enormous stock buybacks. Even so, 2018 turned out to be the best year for economic growth under Trump, with GDP rising by 3%, just half of what he promised. Overall, of course, because of the pandemic, Trump ended his term with the worst economic growth since Herbert Hoover and the Great Depression, and the only President since Hoover to leave office with fewer people employed than when he started.
In 2021, Biden’s first year in office, GDP growth was 5.7%, nearly reaching the 6% Trump had repeatedly promised and failed to deliver. Nominal wages rose by 4.5%, the highest rate nearly 40 years, with lowest wage earners seeing the highest rates of wage growth. Corporate profits reached all-time highs, with non-financial businesses having their best year since 1950. Because of the Child Tax Credit, child poverty was reduced by at least 30%. Today, unemployment is near record lows and recently the number of weekly unemployment claims dropped to their lowest levels in over half a century. With these kinds of results, the political pundits who strictly focus on economic fundamentals would probably be predicting pretty good prospects for Democrats in the upcoming midterm elections. In reality, the opposite is actually the case, with Democrats expected to lose their congressional majorities, perhaps by substantial margins.
Of course, those gaudy Biden economic numbers are all undermined by the one other economic statistic the media has fixated on, inflation, which is currently running at around 8.5%. Core inflation, which excludes food and energy is only slightly better, at just under 6.5%. Indeed, a rise in inflation was expected as the combination of the massive government effort to keep individuals and businesses afloat during the pandemic and the emergence from the worst of the pandemic kicked in. As something approaching normalcy returned due to vaccinations and the effects of the government support faded, it was hoped that inflation would begin to subside. In fact, first quarter GDP in 2022 did decline by an inflation adjusted 0.4%, largely due to the fading impact of government supports and a decline in inventories which had risen because of over-ordering due to pandemic-related supply chain disruptions. But Russia’s invasion of Ukraine, with its attendant spike in energy and food prices put an end to that. So, just how high inflation has risen and just how sustained it has become is what has been really unexpected. And it’s not likely to get better anytime soon. With the virus raging across China once again, we can expect more supply chain problems and renewed shortages in the next few months. And with the war in Ukraine looking as though it may grind on for some time, prices for oil, gas, fertilizer, wheat, and sunflower oil will probably remain elevated.
Rising inflation is a global issue and not confined to the US alone. Today, Eurozone inflation is 7.5%, just a point below the US rate, and even Japan, which has been fighting deflation for decades, has seen a current inflation rate that is its second highest rate since the early 1990s. Yet, despite its global nature, it does seem clear that, at least in 2021, inflation was much higher in the US in 2021 than in the rest of the world. There are a number of theories to explain that divergence. There is the obvious theory, which Republicans have glommed on to, that Biden’s enormous pandemic spending has driven higher inflation. That theory clearly ignores the enormous shift that Americans made during the pandemic from spending on services to purchasing goods, as well as the supply chain disruptions created by the pandemic that also exacerbated the shortage of those desired goods.
Others point to the historic rise in corporate margins that seem to indicate price gouging. Matt Stoller, who admittedly comes at this from a specific point of view, estimated that 60% of the 2021 inflation went directly to excess corporate profits. Similarly, a Canadian economist estimated that excess profits accounted for over 25% of the inflation in that country. Indeed, CEOs are constantly bragging on investor calls about their ability to raise prices beyond their increased costs of input. As the CEO of Colgate-Palmolive put it, “What we are very good at is pricing. Whether it’s foreign exchange inflation or raw and packing material inflation, we have found ways over time to recover that in our margin line”.
As it has done in so many other areas of our society, the pandemic has exposed the weaknesses, failures, and inequalities in the current neoliberal and globalized economic order that developed over the last half century. In fact, the pandemic has illustrated that it is hard to imagine a more stupid system for running our economy than the way it is currently configured. We have outsourced core inputs to our economy to some of the most illiberal and unstable countries which actively work against American interests. We have outsourced manufacturing to countries that provide the lowest wage workers and minimal regulation, producing our clothing in horrific sweatshops in Bangladesh and building our computers and smartphones in prison-like factories in China. The production of critical new technology, such as solar panels, computer chips, and electric car batteries, is now mostly produced in Asia and, to a large extent, China. We rely on China for the production of masks, surgical gloves, and even hand sanitizer.
At the same time, we have suffered massive consolidation and concentration within industries. Today, just three global alliances carry 80% of ocean shipping. Virtually every shipping container in the world is made in China, creating a government-supported monopoly in that critical piece of infrastructure. As literally dozens of ships waited to offload their cargo at the ports of LA and Long Beach as the pandemic eased, the obvious question was why they couldn’t be rerouted to other West Coast ports to ease the burden. The answer turns out to be that most of those other ports do not have the depth needed for many of these new container mega-ships nor the infrastructure to handle them. In addition, US ports are incredibly inefficient in turning ships around, with no US port even in the top 50 in that metric. The LA and Long Beach ports, which handle nearly 40% of all US import/export traffic, don’t even crack the top 300. The pandemic also revealed that most port truckers are independent contractors who don’t get paid for wait times and have consistently been the victims of wage theft primarily due to worker misclassification. All this explains why there was a port trucker shortage as unpaid port wait times skyrocketed even as the pandemic was still raging.
It doesn’t get any better when all that imported cargo finally gets out of the port. Long-haul truckers are treated little better than their port counterparts, facing static wages for longer hours, few benefits, health issues associated with the job, and cratering unionization driven by increasing pressure to become contractors who are also not paid for wait times. By the turn of the century, truckers were making around 30% to 40% less than they had just 20 years earlier. For the last two decades, truckers’ wages have stagnated even though their hours worked has increased. While there is a dispute about whether the annual turnover rate among truckers as a whole is higher than other blue-collar jobs, there has consistently been a shortage of qualified long-haul truckers available at the wages being offered. Because of that, during the pandemic, the round-trip time for a container to be trucked between LA and Chicago nearly doubled, from 30 days to 55.
There are similar problems with rail traffic. Once again, consolidation has led to just four railroads, Union Pacific (UP), Norfolk Southern (NS), BNSF, and CSX, controlling nearly 90% of the freight traffic in the country. And even those four have literally divided the country in half, with UP and BNSF controlling everything west of Chicago and NS and CSX controlling everything to the east. A 2012 study showed that nearly 80% of the country’s freight rail stations were only serviced by one railroad. Every one of these four suffered serious congestion issues in 2021, due to insufficient staffing, poor safety protocols, and lack of any excess capacity which was previously sacrificed in the name of profits. UP even shut down its entire intermodal service between Chicago and the entire West Coast, including the ports of LA, Long Beach, Oakland, and Tacoma, for a whole week in order to clear the backlog of containers, some of which had been stranded in Chicago for over a month.
The supply chain snafu of 2021 was years in the making and entirely predictable. A government study in 2015 highlighted the issues at our ports after labor issues created similar chaos in 2014-2015. The long-haul driver shortage had been documented for years. And the problems with rail freight have also been with us for years. All of these issues were the result of what sociologist Elizabeth Popp Berman calls the consultant-driven “economic style of thinking” that actually originated with the “best and the brightest” of the Kennedy Administration. This technocratic style survived the horrific failures of its implementation especially in regard to Vietnam, and by the 1970s it had come to provide a micro-economic counterpart for public policy that Milton Friedman and the “Chicago School” and their abandonment of Keynesianism provided for macro-economic policy. That style still dominates US public policy thinking to this day. In many ways, this economic style of thinking is similar to laissez-faire economics but is actually more pernicious because it infects public policy issues unrelated to economics.
The core of the economic style of thinking is “efficiency” and over the last 40 years it has replaced equality and even justice as the baseline in policy and even law. Its corollary is the cost-benefit analysis, which is made to sound like a straightforward, almost scientific calculation but almost always embeds the biases of those given the power of actually making the calculation. (Just think of how often CBO projections or the Federal Reserve’s interest rate forecasts have been wildly off the mark.) In fact, Friedman’s theory of the primacy of the shareholder dovetailed perfectly with the economic thinking of efficiency because those who were willing to put their capital at risk to create the “markets” that drove the desired “efficiency” should be appropriately rewarded for their “success”. At the same time, Richard Posner was also revolutionizing legal theory under the same rubric that focused on using law to promote the efficiency of markets rather than equity or distributional effects.
Efficiency became the primary benchmark for policy, was implemented by the use of markets, and used prices as the primary measurement of efficacy. The efficiency model has created absurd fictions like the concept that there is a “market” for health care, rather than treating it as a human right; that there is an acceptable level of total toxic pollution where large polluters can “trade” their unacceptable levels of toxicity, with no concern for the health effects for their immediate surroundings or other external costs, to other firms with already lower levels, basically codifying environmental racism; that there must be work requirements for welfare and means testing for child care.
This primacy of efficiency, perhaps even more than the primacy of the shareholder, led to the abandonment of antitrust enforcement, the destruction of unions, the prevalence of the gig worker, the end of pensions, and the privatization of the public square. In antitrust regulation, there was no merger that could be stopped if the company’s vast team of consultants and lawyers could point to some future chance of consumer benefit usually measured by lower prices. Other considerations, such as the loss of jobs, the reduction in wages, the devastation of regional or local economies, an increased barrier to entry for other would-be competitors, or even the concentration of corporate power, were simply ignored. The result is that our economy has become cartel-ized. Today, cartels of around five companies or less run virtually all industries, including but not limited to airlines; health insurance; drug stores and pharmacies; drug distributors; beef, pork, and chicken production; banking, and, as noted above, the shipping industry. These cartels regularly engage in price-fixing and even wage-fixing as well as price-gouging, and usually pay a slap-on-the-wrist fine for doing so in the rare cases they are charged. In addition, they create high barriers to entry and often “buy to kill” new competitors that, in many cases, actually offer superior products. Finally, these new cartels have little incentive to reinvest and innovate because their near-monopoly position is virtually secure.
Similarly, the desire for more efficient markets drove the effort to move the risk and burden of defined benefit plans from the employer onto the individual employee via the transition to 401(k) retirement plans. That transition was partly propelled by the fact that firms were repeatedly raiding or underfunding those pension plans in an attempt to sustain their stock price or finance downsizing and other restructuring efforts. Unions were decimated by a political and legal system that basically allowed the replacement of striking union workers, best illustrated by Reagan’s destruction of PATCO, and forced to accept two-tier wage systems as well as the increasing willingness of firms to use independent contractors.
All of this was rationalized as part of a general effort at deregulation that would “unleash the free market” and drive the efficiency and innovation necessary to move beyond the stagflation of the 1970s. It is that deregulation effort that led to the rise of independent contractors in the trucking industry and the stagnation and even reduction in their wages. Deregulation of the railroads in the 1970s was a boon for the freight rail operators who faced little competition but also led to the decline of passenger rail service and the abandonment of over 100,000 miles of track that serviced what were then less populated and therefore less profitable routes. That deregulation, along with the erosion of antitrust enforcement is how we ended up with the freight rail cartel of today and the problems that go along with it.
Concomitant with deregulation was the privatization of the public sphere. Here again, this was sold under the banner of efficiency. The public airwaves have been privatized as the FCC sold off the spectrum, creating a massive windfall first for the winners of the auction lottery and then later for private equity. With charter schools and even school vouchers, we have partially privatized public education. Water systems, roads and road maintenance, parking meters and enforcement, food safety inspections, prisons, the electrical grid, and so much more have all been privatized.
By the late 1990s, the economic style of thinking meshed perfectly with the push for globalization. The promise of globalization was that the process would leave everyone better off. Offshoring manufacturing would lift millions in the less developed world out of poverty. The reduction in prices for the developed world would create extra wealth that could be re-invested in the new entrepreneurial and high-tech economy. Yes, there would be losers in this transaction, especially in the developed world’s blue-collar work force, but government promised to help them transition to better paying jobs in the “new economy” and/or develop their own entrepreneurial efforts. Indeed, by the end of Bill Clinton’s term in 2000, there seemed to be a realistic prospect of that actually happening. He had raised taxes on the rich; the economy had been booming; the government was running such an incredible surplus that it was predicted the entire national debt might be erased in another five years. Government clearly had the money to invest in the future and even radically transform the American economy to respond to the challenge of climate change and fast-changing technology.
We all know what happened instead. Yes, millions in the less developed world were lifted out of poverty but that came at the expense of the developed world’s labor force. Here in the US, at least for blue collar workers, the promise of reinvestment of the benefits of globalization was abandoned and instead re-routed to the investor class and rent-seekers. With the Supreme Court installing Bush as President despite losing the popular vote, the surplus was never invested but distributed as a huge tax cut for the wealthy under the guise of “it’s your money”. The majority of actual government investment went in to building a vast new security state and prosecuting two useless and endless wars in Afghanistan and Iraq in the aftermath of 9/11. (It is depressing to think what might have been had Gore become President with at least an outside chance to truly begin building the green economy necessary to keep the planet inhabitable.)
The one substantial social policy that did get implemented under Bush was No Child Left Behind which perfectly reflected the pernicious effect of the efficiency model of thinking on public policy unrelated to the actual economy. Rather than truly addressing the ridiculous and unequal methods for financing public education in this country, the program somewhat absurdly tried to measure educational performance via standardized test scores which resulted in education simply becoming teaching to the test. In addition, the program’s focus solely on reading and math has led schools to de-emphasize other important areas of the curriculum such as civics, social studies, and history.
The confluence of these three trends – shareholder supremacy, the primacy of efficiency, and globalization – have created the perfect conditions for the explosion of the stupid economy. Just-in-time delivery systems have little or no capacity to deal with supply or demand shocks as the system is designed to reduce the need for inventory. That has resulted in a shortage of warehouses when supply chain failures made maintaining inventory essential. We’ve seen incredible consolidation within industries in order to achieve greater economies of scale and easier access and control over the global supply chain. These cartels have maximum pricing power at every step of the supply chain and little incentive to provide a higher level of service that would more easily accommodate these swings in supply or demand. They have also used their predatory pricing power to drive smaller competitors out of business. The big box stores like Walmart decimated small-town business. Amazon destroyed the local bookstore. The cartels that control seed, beef, poultry, pork, grain, and farm equipment have destroyed the small farm. Those cartels have been accused of price fixing in beef, poultry, and pork. The result, according to one Montana cattle rancher, is that “Rural America is one huge slum, and this is a result of the lack of anti-trust enforcement”. Despite the already-present dangers of climate change and other external costs, we spend billions subsidizing the oil and gas cartel in order to achieve the fictional efficiency of “energy independence” and then are surprised when those companies export “our energy” to other areas of the world where they can receive higher prices.
We’ve seen the rise of platform markets, such as Amazon, Google, or Uber, which initially prioritize growth over profits until their predatory pricing power has driven enough competitors out of business, at which point profits are largely unconstrained. Those platforms are now morphing into vertical monopolies where they are both the producers and distributors of products, giving them the power to not only see what competitors are doing on their platform but also prioritizing their own products over others. We’ve created a situation where newspapers that basically reprint AP stories are governed by publishing rules but platforms that do virtually the same thing by pushing usually unpaid-for content out to their users are not.
Offshoring, the threats to offshore, and the use of independent contractors and temporary workers have suppressed employment and wages. The transfer of wealth from wage-earners to shareholders is staggering. American Express spent over 40% of its revenues on wages in 1960 and just over 10% today, even as the percentage going to shareholders doubled. The aforementioned Union Pacific spent nearly 50% of revenues on wages in 1960 and just over 20% today, while 39% currently goes to shareholders. The railroad has basically stopped investing in equipment and research and development and actually has a negative current reinvestment rate. Shareholders’ increasing take has also been supported by the reduction in the corporate income tax, from 52% in 1960 to 21% today, and, using a variety of tax breaks and loss carry forwards, we know many pay no corporate tax at all.
In order to keep the costs for businesses low, the Federal Reserve set an artificially low interest rate policy that guaranteed higher unemployment, and therefore lower wages, but also provided little return for savers. Instead, the only way to build wealth was through speculation and/or asset appreciation. What we end up with is the “mining” of a virtual currency, which largely tracks the price of other commodities like gold and oil and creates more greenhouse gases than some individual countries, and schemes like NFTs which have no inherent value at all. Similarly, protecting the asset inflation of housing has, unsurprisingly, led to NIMBYism and a nationwide housing shortage. Now, the Fed is preparing to deal with an inflation issue largely caused by the failure of antitrust and globalization by doing what it always does, raising rates to create a recession which will provide that large pool of unemployed workers that business needs to keep costs down and reduce the threat of increased unionization.
Another artifact of efficiency is the fiction that choice somehow indicates competition. The result is that we are forced to go through this annual ritual of choosing which health insurance plan to enroll in; which prescription drug plan, which 401(k) investment fund or strategy; which electricity provider; whether to buy the oil or gas to heat our home at a fixed rate or at the spot rate; whether there is a better cable and cell plan available; and so on. Changes to your health or prescription drug plan then usually requires coordination with your doctor, which wastes even more of your time and theirs. It is an absurd process since most of us are not really equipped to make these kinds of decisions. Instead, we do it in order to check whether the adequate process we had selected the year before hasn’t drastically changed and we end up getting ripped off for the upcoming year.
Finally, we have created an entire generation that was sold the lie of the new economy and borrowed away their future to get the education that they were told it demanded. Instead, all they got was a mountain of nondischargeable debt and the transfer of their future wealth to financiers, loan administrators, and university administrators. Today, this highly educated work force is wasting their talents in service jobs and, unsurprisingly, driving the recent renewal of union organizing in those industries.
The Republican party has always been the party of business, so it is no surprise that the primacy of the shareholder is straight out of conservative thought. But what is important to realize is that Berman’s notion of the economic style of thinking and the primacy of efficiency is really a product of the center-left. As Berman notes, the whole concept was developed under the Kennedy administration and was expanded to cover social policy under LBJ. The Carter administration provided the intellectual rationale for deregulation. Clintonism and the “Third Way” approach not only continued the deregulatory push but was also a driving force behind what turned out to be the false promises of globalization. Unsurprisingly, Republicans are only too happy to coopt this moderate Democratic notion of efficiency when it expands corporate power. But, for Democrats, especially liberal Democrats, the concept constrains efforts to achieve real equality, justice, and other social policy goals. The primacy of efficiency has led to the massive transfer of wealth from the workers who actually produce goods – the garment workers in Bangladesh, the slave labor Uighurs in China, or the farmers in America – to the investor class and the middlemen of the global distribution systems.
The economic style of thinking is how we end up with arguments about means-testing childcare and student loan forgiveness when most of the rest of the developed world provides childcare universally and higher education comes at a minimal cost or is often free. It has been a primary force in creating the stupid economy we live in. In the last decade and a half, Democrats have had control of Congress and the White House in the wake of two historic crises – the financial crisis and the global pandemic. With two chances to restructure both government and the economy, it appears the Democratic legacy will be a kludgy health care program that further empowered health insurers and a glorified highway bill that will probably increase carbon emissions even as climate change wrecks increasing havoc. The reason they have nothing more to show than that is primarily because of the center-left’s obsession and myopia about the economic style of thinking and its capture by corporate interests. Because of that, today Democrats are in danger of being outflanked by the New Right’s attack on corporate power in its pursuit of white nationalism and autocracy. What the center-left has done over the last 50 years is sacrifice Democratic values for economic value. And the country has paid and will continue to pay an enormous price for that betrayal.