Economic Autopsies

Is America stable enough to come roaring back—or so in hock to large capital that more failure is preordained?

The buzz you hear is not from mid-summer cicadas. It’s the chorus of Wall Streeters betting that recovery will soon blossom like the flower-drooping dogwoods in Central Park. On little cat’s feet, the price of a two-bedroom condo in Manhattan has stolen past $2 million, and glossy apartment brochures once again weigh down The New York Times. Plutocrats of finance lean back contentedly in their hand-tooled leather chairs: “Whew! Dodged a bullet. Blew up the world and still notched a near-record bonus pool. Must have done something right.”

There is broad consensus on the causes of the financial collapse. Beguiled by academic theories of “rational markets,” policy-makers over some 30 years gradually withdrew nearly all regulatory oversight from big financial institutions. The peak of permissiveness came in 2005-2006, as Federal Reserve chairman Alan Greenspan was pumping out rivers of new money to squelch an American recession.

Interest rates fell to record lows, and cash-stuffed investors clamored for yield. By 2005 or so, even the whitest of white-shoe firms were vacuuming up toxic sub-prime mortgages, credit card receivables, auto loans, and the junkiest paper from absurdly leveraged corporate buyouts. The illusionist alchemy of structured finance, abetted by venal rating agencies, shape-shifted the dross into investment-grade gold that the banks spread throughout the globe. When reality finally bit down hard, there was no place to hide.

Few experts, aside from Greenspan and Ben Bernanke, his successor at the Fed, any longer insist that the crisis was an utterly unpredictable “hundred-year” random event. Quite a few people, in fact, actually foresaw it. In 2005, just when the asset bubble was sliding toward hyperinflation, Raghuram G. Rajan, then chief economist of the International Monetary Fund, laid out the risks in painfully precise terms, at a Kansas Federal Reserve conference, of all places, convened to honor Greenspan. It was a brave speech. The elite of the economics and finance professions was in attendance, so Rajan must have expected to be booed off the platform, as he nearly was. Prominent among the rock-throwers were Bob Rubin and Larry Summers, successive Treasury secretaries in Bill Clinton’s last term, and field generals in the deregulatory blitzkrieg.

The mega-jackpot question now is whether the crisis is over, or at least in the first stages of winding up. The big banks have been rescued, one way or another, and the freefall in output and employment has been arrested. But while bond traders and foreclosure specialists are enjoying chubby good health, the rest of the economy still feels mangy and sulky-mean.

Two books, from quite different perspectives, shed contesting search beams on the topic. The subtitle of Stephen J. Rose’s Rebound: Why America Will Emerge Stronger From the Financial Crisis–says it all. Rose is an expert on demographics and social strata, a former community organizer, and a Democrat, but with a blue-dog streak. He was an adviser to Robert Reich when Reich served as Labor secretary in the Clinton Administration, but his data series are much like those long promulgated by the Cato Institute and Alan Reynolds, among others, to refute the notion that inequality increased over the last quarter century.

Rose is much more careful than Reynolds, and his data are mostly solid. His central point is that official counting conventions tend to exaggerate long-term trends like the growth in inequality, the stagnation in middle-class incomes, the shortfalls in personal savings, and other symptoms of economic distress. He doesn’t deny such trends, but he argues that they are not nearly as extreme as often portrayed. He sees the glass as “three-quarters full rather than three-quarters empty”–which leaves a much stronger base for a recovery than most pundits imagine. Liberal polemicists would do well to take better account of his data–although I think he is missing some worrisome trends that could derail his forecast.

There are few statistics, and nary a graph, in Barry Lynn’s Cornered, which is more an impassioned howl of anger than a careful analysis. Lynn’s target is what he calls the steady “financialization” of industry, the tendency for business strategies to be twisted to serve the short-term interests of a “neofeudalist elite” of financiers. Lynn’s book is far from flawless, and especially in the early chapters, some of its arguments and examples are either wrong or inconsistent. But it gains focus and power as it proceeds, building to a stem-winder of a conclusion that I found quite convincing–that corporate power, which during much of the postwar era was uneasily distributed among employees, CEOs, investors, communities, and customers has “become concentrated once more in the capitalist alone.” So we have “control without ownership; power without responsibility; appetite without mind.”

Rose pays special attention to income trends. The standard Census Bureau data are reported by “household,” the bureau’s basic statistical unit. Since 1979 or so, the Census data show that inflation-adjusted growth for the bottom half of the population is not much above zero–running at a third to a half percent a year. Rose starts by adjusting the data for trends in household formation. Up through the 1970s, nuclear families stayed together longer–granny helped take care of the kids, and junior and sis frequently lived at home until marriage. With rising affluence, and large benefit increases for the elderly, granny kept her own digs, and kids got their own places sooner. One consequence was that household formation grew much faster than population, automatically dampening reported growth in household incomes.

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