‘It’s a Barnum and Bailey world, just as phony as it can be.” Those words are from the 1933 song “It’s Only a Paper Moon.” Seventy-five years later, Americans understand that the financial system has as much substance as a handful of moon dust: the big banks are broke, sitting on mathematicized synthetic portfolios and derivatives that threaten to touch off a nuclear reaction because they are so interconnected in the global financial system. Meanwhile, the consumer, government, and financial sectors are drowning in excessive debt that guarantees a deep recession experts did not see coming but are being called upon to head off. In short, U.S. growth since the 1980s has been powered largely by unsustainable debt. In great measure, that growth was phony.

During the recent political campaign, Barack Obama and John McCain both boasted that as president, they would cooperate with the opposition. That is a certainty now and would have been had McCain been elected. The reason: no one wants to see the global economy go back to 1933. “There will be more cooperation,” says Keith Poole, professor of political science at the University of California, San Diego. Two years ago, Poole was coauthor of a hot academic book, Polarized America: The Dance of Ideology and Unequal Riches, showing that over the past three decades, political polarization and income inequality have increased in tandem. Now, with the economic threat hanging over the world, the political polarization may melt a bit. And since Obama wants to rein in the fat payoffs at the top, income inequality may ease somewhat.

When they were politicking, Obama and McCain generally spewed the same line. Obama blasted Wall Street and showered love on Main Street. So did McCain. Both talked reregulation. Both tried to distance themselves from Bush administration laissez-faire ideology.

“The kinds of economic policies normally associated with Democrats are seen as the solution” to the sinking economy, says Gary Jacobson, a professor of political science at UCSD, whose office is adjacent to Poole’s. The current Republican administration has thrown trillions of dollars at the credit crisis — even taking ownership positions in banks and arranging shotgun marriages of financial institutions. President Bush “has put government in charge of the private sector in ways that in the past no Republican would have ever touched.”

Although the Bush crowd basically threw money at banks, not people, in my opinion the Republicans may not put up much of a fuss about Obama’s health-care and entitlements-expansion proposals. Both sides of the aisle will honor spending and easy money. Certainly, reregulation won’t encounter much resistance: “There is a broad consensus that under deregulation, things got out of hand. There will be some form of increased regulation and oversight” of private-sector activities, says Jacobson.

“The most disastrous thing was not regulating those things called credit default swaps,” the unregulated, unmonitored, incendiary derivatives that guarantee debt, says Poole. “But you have to be careful with regulation. The road to hell is paved with good intentions.” When the Enron/WorldCom fraudulent-accounting controversies hit in the early 2000s, Congress passed Sarbanes-Oxley, a bill requiring companies to spend much more on internal financial control. But the requirements “raised the costs of compliance for small firms” and therefore had bad side effects.

Taxes must be approached carefully too. Obama’s proposed increases on higher-income citizens “won’t hurt the economy that much,” says Poole, but to rake in tax receipts, eventually “you have to go down to the middle class. It’s like Willie Sutton. He robbed banks because that’s where the money was.” If things get worse, Obama may have to tap the middle class. After all, Governor Arnold Schwarzenegger is proposing a 1.5 percent sales tax increase to help close a huge budget gap in California.

Obama and McCain promised change, and it is coming, without question. “There is certainly a possibility of a new era, although not a New Deal,” says Jacobson. “There will be a period of more social consciousness. Extravagance will be out. There will be more focus on the societal costs of economic development.” The environmental movement may gain traction lost since 1980. Here’s a tip for cocktail conversation: Alan Greenspan, Rush Limbaugh, and Ayn Rand are out; Paul Krugman, Al Gore, and Rachel Carson are in.

Energy and environmental strategies “have to be designed not to murder low-income people,” says Poole. To please one constituency without upsetting another, “Obama will have to be the Harry Houdini of politics.”

The late historian Arthur Schlesinger Jr. theorized that there were 30-year cycles in politics. The public-sector activists (call them liberals) take over, and then they are ousted in favor of the private-sector expansionists (conservatives). The liberals prevailed under Teddy Roosevelt (1901), Franklin Delano Roosevelt (1933), and John F. Kennedy (1961). In between the liberal periods, conservatives such as Warren Harding, Cal Coolidge, Herbert Hoover, Dwight Eisenhower, Richard Nixon, Ronald Reagan, and George H.W. Bush had their times in the spotlight. Schlesinger had thought a liberal cycle would rev up under Bill Clinton, but Newt Gingrich and then George W. Bush threw off the timing.

Corporate America was in the saddle in the 1980s and from 1995 to 2007 and was able to thwart so-called liberal initiatives. But greed got out of control: chief-executive pay got ridiculous, while middle-class incomes stagnated. Stockholders realized they had been paying big bucks for nonperformance. The public may be getting wise to that too. Perhaps the watershed was this fall, when Congress initially voted down the $700 billion bailout. Pundits said 99 percent of the mail received by Congress members bitterly opposed it. “It was standard populism at work — Wall Street bankers in silk top hats versus the little guy,” says Poole. Clearly, “Obama will do something about lifting the bottom” rungs on the income ladder, particularly through education initiatives. There won’t be resistance from the right: “I have been reading the blogs of conservative intellectuals. They know we have to start getting serious about education.”

And Poole knows that something must be done about derivatives: “We have to get this questionable paper out of the credit system quickly to unclog the thing,” he says. But no one has come up with a credible plan to wipe away the toxic derivatives and start winding down the whole process. Consumer debt is a dilemma: the savings rate is close to zero. But if people start saving, the recession will deepen. Any ideas?

You may find yourself lamenting, “It’s only a paper moon,” unless the pols who now love each other and promise to cooperate prove that they know how to prevent a 1933 redux.

More from SDReader

Comments

shizzyfinn Nov. 26, 2008 @ 12:23 p.m.

It's killing me that none of y'all pundits are talking about a move to a single-payer health system as one step toward economic recovery. Talk about your low-hanging fruit. Currently, our country spends about 15% of GDP on health care, whereas other industrialized nations use single-payer, which costs them closer to 10%. So we switch to single-payer, and boom, all of a sudden we've got 5% more GDP to play around with. That equates to more than $500 billion a year, amigos - big money.

This purely economic gain doesn't even take into account other pluses: we will have no more uninsured Americans; broader access to preventative medicine will reduce aggregate bills even further; U.S. employers will no longer be on the hook for coverage; medical bankruptcies will cease striking hundreds of thousands of Americans per year.

In truth, the move to single coverage is a no-brainer - it'll make all Americans better off, indirectly if not directly. And polls show that a clear majority of Americans, including a clear majority of doctors, are in favor of major health care reform. For decades, though, a small group of folks with deep pockets have succeeded in preventing change.

But today's political climate seems like one in which we could actually get this change done. For me, it'll be the big test of Barack Obama. If he can push through true single-payer, he really is the mack. If he can't, he's a mere mortal. If he doesn't even try, he's a phony.

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jv333 Nov. 26, 2008 @ 5:59 p.m.

I suggest a bold and symbolic more for our new Administration. A 10% reduction of all federal salaries over $140,000 for 2 years...and a 10% slash of all federal programs (unless extreme hardship can be demonstrated) for 2 years. The Pentagon should also have their budget scrutinized...from what I've read, they can't even identify 50% of their assets and their books were $1 trillion out of balance. So I'm sure they can find several billion if they start looking.

I was no huge Reagan fan, however, maybe it's time to have another Grace Commission. In 1982, President Ronald Reagan requested an investigation into waste and inefficiency in the Federal government. But let's also keep in mind that 70% of the $10 trillion nat'l debt was rung up under Reagan, Bush I and Bush II.

The Grace Commission Report was presented to Congress in January 1984. The Report claimed that if its recommendations were followed, $424 billion could be saved in three years, rising to $1.9 trillion per year by the year 2000.

It estimated that the national debt, without these reforms, would rise to $13 trillion by the year 2000, while with the reforms they projected it would rise to only $2.5 trillion. In reality, the debt reached $5.8 trillion in 2000.

The Report said that one-third of all income taxes is consumed by waste and inefficiency in the Federal Government, and another one-third escapes collection due to the underground economy. "With two-thirds of everyone's personal income taxes wasted or not collected, 100 percent of what is collected is absorbed solely by interest on the Federal debt and by Federal Government contributions to transfer payments. In other words, all individual income tax revenues are gone before one nickel is spent on the services which taxpayers expect from their Government."

The Congress did not act on the recommendations.

The federal govt can lead by implementing some serious austerity programs.

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Burwell Nov. 26, 2008 @ 6:23 p.m.

The consumption based economy is dead and will never recover. The Fed's push to jumpstart the economy by "unfreezing" the credit markets will not restore the health of the economy. There is no little or no consumer demand for credit. Most consumers have cut back spending and those who still have jobs want to repay their mountain of debt, not incur more debt. The current generation of homeowners have been burned and will never again engage in debt-financed spending rampages of the sort we've seen in past years.

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Burwell Nov. 26, 2008 @ 6:52 p.m.

The 401(k) and the IRA are the primary causes of the financial dislocations we are witnessing on Wall Street. The 401(k) law was enacted in 1977 and unleashed a massive torrent of cash on the financial markets which the markets did not need and could not handle. The purpose of the stock market is to allocate capital to corporations that have demonstrated the ability to generate above average rates of return, and not to fund retirements or provide college money for junior. Public corporations were not engaged in massive manufacturing infrastructure and capital spending projects that were needed to sop up excess 401(k) and IRA cash flooding the market. The excess cash simply drove stock prices into the stratosphere without regard to economic fundamentals. The 401(k) and IRA should be eliminated because these plans have destroyed the ability of the markets to allocate capital efficiently.

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Don Bauder Nov. 26, 2008 @ 10:54 p.m.

Response to post #1: The economic woes of today would have to continue to achieve this. Best, Don Bauder

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Don Bauder Nov. 26, 2008 @ 10:58 p.m.

Response to post #2: The big public sector abuses are largely in retirement benefits. The public may be in a mood to get those under control. Best, Don Bauder

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Don Bauder Nov. 26, 2008 @ 11:01 p.m.

Response to post #3: Even the economists who believe the consumer/debt-based economy must end would like to inflate such spending now, then reform later. It's like that old prayer, "Lord, make me chaste. But not today." Best, Don Bauder

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Don Bauder Nov. 26, 2008 @ 11:04 p.m.

Response to post #4 That is a novel interpretation. I'm not sure I agree, and I definitely don't think this is doable now. Best, Don Bauder

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Anon92107 Nov. 28, 2008 @ 2:57 a.m.

Don, the #1 fact is that everything you have documented that is wrong in America and San Diego today is due to Republican Party domination for far too many years.

And the worst consequence is that American education is a total failure, as certified by the facts that 46% voted for McCain-Palin while San Diegans re-elected Sanders and elected Goldsmith in spite of the facts that you and most other journalists have been continuously reporting the decline and fall consequences of Republican Party political polarization that has produced income inequality destroying of the American way of life for at least three decades.

Indeed, “we have to start getting serious about education.”

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Don Bauder Nov. 28, 2008 @ 6:52 p.m.

Response to post #9: Yes, education is a key to our future. But in San Diego, Mayor Sanders wants to close libraries, and the establishment is still talking about a massive subsidization of the Chargers, owned by a billionaire. (The Chargers claim they want a private sector deal. Don't listen to such nonsense. They won't do any deal without a gift of public sector land.) If Sanders were either intelligent or honest (and he is neither), he would come up with bold steps such as closing down CCDC and SEDC. Best, Don Bauder

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Anon92107 Nov. 29, 2008 @ 2:49 a.m.

Response to post #10:

Interesting how the Bush and Sanders administrations are spending as much money as they can as fast as they can today to enrich and empower the Republican Party aristocracy at the expense of the wealth of America, leaving no money for all other Americans who are now devolving back into peasant class just like the old days before democracy.

Even more interesting is the fact that this year the majority of San Diegans and 46% of American voters still voted Republican regardless of the consequences that they are destroying American Democracy and the American Way of Life, accelerating the decline and fall events that we read about daily.

It's as if republicans no longer bother to read and think because the education system they have politicized has failed to teach them that successful democracy requires independent reading and thinking.

The GOP has truly become the religion from Hell.

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Don Bauder Nov. 29, 2008 @ 11:20 p.m.

Response to post #11: In San Diego, the Lincoln Club is not known for a commitment to education. Best, Don Bauder

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Anon92107 Nov. 30, 2008 @ 3:09 a.m.

Response to post #12:

The worst crime the Republican Party has committed over the last eight years is their betrayal our American Military Heroes and Patriots with their criminally negligent leadership and continuous failures in protection, equipment, supplies, training and diplomacy.

History has proven far too many times that any political aristocracy that betrays their military and promotes uncontrolled thefts of public funds such as the Republican Party is doing in Washington, San Diego and all over America for personal wealth and gain will fail.

While the people of America rejected the Republican Party in Washington this month, unfortunately the San Diego Republican Party still controls the minds of far too many voters in San Diego who have failed to read and think about the lessons of history.

“Moon Dust” is just one of the devastating decline and fall consequences that are the legacy of the Republican Party that is impoverishing America today.

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Don Bauder Nov. 30, 2008 @ 2:13 p.m.

Response to post #13: San Diego remains in the Dark Ages. Surprised? Best, Don Bauder

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shizzyfinn Dec. 2, 2008 @ 11:34 a.m.

Response to post #5: Maybe you're right, Don, that a shift to single-payer can only happen if the current economic woes continue. But doesn't just about every indicator suggest that we're going to be living in Woe City for the foreseeable future?

Until the last few years, when asked about switching to single-payer, mainstream politicians often fell back on "it's not politically possible," which is code for "my rich supporters aren't interested." But now you hear GM pointing out that health care adds $1,000 of cost to each car, which means that the current system is chafing even the investor class. So change can't be too far behind.

And the ball is already rolling legislatively. H.R. 676 would create a single-payer system of guaranteed healthcare for all, and already has 93 co-sponsors in the House.

It would speed things up if a politician with Obama-type charisma and momentum has the courage to tell his financiers, "listen, we're doing this, and we're doing it now." It would also help if We The Sheeple sacked up and started demanding that our elected officials give us what we want.

But even in the absence of that leadership and that responsible citizenship, I think we'll get to single-payer eventually. The waste inherent in the current system is so substantial (roughly 5% of GDP), and the stories so pervasive and sad (40 million uninsured, and bankrupt grandmas everywhere), that we'll have to address it eventually.

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Don Bauder Dec. 2, 2008 @ 4:41 p.m.

Response to post #15: You make excellent points. Actually, global businesses would be big beneficiaries of a government-supported health system. There is an excellent book on the pension mess by Roger Lowenstein (reviewed here a couple of months ago. It brilliantly exposes San Diego's pension woes.) In one chapter on General Motors, it tells how Detroit was ready to embrace nationalized medicine, then caved in to big pressure from the business community. Best, Don Bauder

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