(This is a follow up to the post Secrets of the Temple.1: More Than a Doorstop, dated 1/13/13.)
As I wrote in my first post on William Greider’s history of the Federal Reserve board, one of the aims of “Secrets of the Temple” is to question whether Ronald Reagan really was the primary source of the economic doctrine once known as Reaganomics, a package of economic policies that has led to skyrocketing economic inequality around the globe over the last 30+years. Greider’s book identifies Jimmy Carter’s appointment of Paul Volcker as Chairman of the Federal Reserve Board in 1979 as the watershed moment that began this era of public policy in the US. He’s not alone in doing so. David Harvey’s “Brief History of Neoliberalism” begins with the identification of a cluster of four moments. The first one to take place in the US is the rise of the 6 foot 7 inch chairman, whose stature in the world of finance would come to rival that of Andre the Giant in the world of professional wrestling:
1. 1978: Deng Xiapoing begins to liberalize China’s state-run economy.
2. May 1979: Margaret Thatcher elected Prime Minister of Britain.
3. July 1979: Paul Volcker appointed chairman of the US Federal Reserve
4. November 1980: Ronald Reagan elected President of the US.
Greider’s book paints a more nuanced picture of the latecomer to this party than Harvey does. It’s a portrait of a figure who is defined by self-contradiction and inner conflict as much as he is by a unitary adherence to a coherent doctrine. This makes for entertaining reading, since most drama is driven by internal conflicts within the main characters. The complex picture of the man we might refer to as “Double Dutch” emerges in Part 3 of this massive tome, entitled “The Liquidation.”
On the one hand, Reagan came into office as a disciple of Milton Friedman, whose theory of economics identified the preservation of the value of money by eradicating inflation as the primary duty the government must perform to serve the “national” interest. As my last post summarized, this doctrine benefits those who have already amassed large stores of wealth, because it prevents the value of that wealth from declining. That’s why Reaganomics aka Neoliberalism aka The Washington Consensus is very popular with the financial industry and Wall Street. At the same time, monetarism hurts those who are in debt, and even sectors of industry such as manufacturing that are not tied up in finance. Inflation is eliminated or tamed by measures that restrain or even roll back economic growth. Low or absent rates of inflation also increase the real economic value of the outstanding debts most working people and small businesses have, such as mortgages, loans used as start-up capital, and student debt. When small businesses, students and homeowners cannot afford these loans, this in turn hurts economic growth and national productivity. Greider’s central thesis is that American political culture is in denial. We can’t face the fact that the management of economic policy involves an inherent conflict of interest that boils down to a class conflict in which some win and some lose.
“The money question was always political, notwithstanding the myth of the Federal Reserve’s independence…The notion that monetary policy could be disinterested – somehow separated from politics in a way that other governmental policies were not – was the central fallacy inherent in the central bank’s protected status. The notion that some political interests – namely, the financial markets, banks, and investors – were legitimate voices in deciding the correct course of money policy – and others were not – was the central distortion of political power surrounding the Federal Reserve.” (p. 529)
Coming into the book, I expected Reagan to side unilaterally with Volcker, and the financial interests that the Chairman considered to be his constituency (see Secrets.1.) This book shows it wasn’t really like that. Greider paints a picture of a man devoted to three conservative doctrines that were fundamentally incompatible with each other, and suffering the fate of bigamists and philanderers everywhere in the process. The first doctrine was the above-cited monetarism, the second was “supply-side economics,” a policy of tax cuts for the wealthy inspired by Andrew Mellon’s “trickle down” theories of the 1920’s that was actually opposed by Volcker, and the third was a commitment to balanced federal budgets and a repudiation of the kind of direct government stimulation of the economy through deficit spending advocated by economist John Maynard Keynes.
“Reagan comfortably embraced all three doctrines, and for twenty years his speeches had elaborated all three themes. He attacked the “printing press” money promoted by liberals, the burdens of the progressive income tax, and the profligacy of deficit spending…The three schools of conservative thought were united by their aversion to big government, a generalized commitment to laissez-faire economics, and the ‘magic of the marketplace,’ as the President called it. They also shared an active contempt for the ideas of John Maynard Keynes and any who espoused them … Yet the three strands of conservatism contained theoretical conflicts and were potentially incompatible – particularly if all three were pursued at once….How could the supply-side tax cuts pump up economic growth if the monetarists’ money policy was simultaneously retarding it? How could the Reagan program lead to a balanced budget if the tax cuts were at the same time increasing the deficits? Reagan’s team of economic advisers was drawn from all three schools of conservative thinking, and despite their unity in public, they argued intensely among themselves over which priorities truly fulfilled the President’s mandate…The Administration’s internal disagreements were papered over in public, but, ironically, they were most visible to Paul Volcker and the other Fed officials..” (365-366)
For all Reagan’s trashing of Keynesian government intervention in the economy, his tax cuts, union busting and deregulation of finance basically functioned as federal deficit spending. They created economic growth on Wall Street that helped Reagan get re-elected under the banner “It’s Morning in America Again.”
David Cay Johnston’s book Free Lunch recognizes the astounding bonanza of wealth that marked this dawning of the Age of Nefarious. He writes that 25% of the wealth that has ever existed in this entire history of this country was created since Reagan took office. The total real value of the stock market in 2007 was five times what it was in 1980. The problem is that all of this growth was concentrated at the top, while the average income of the bottom 90% of Americans steadily dropped from a high of $33,000 in 1973 to a bit more than $29,000 in 2005.
The source of this strange combination of growth and decline was Reagan’s choice to funnel deficit spending into stock market speculation, rather than productive industries that would have raised working class wages, as Keynesian investment in infrastructure had in the past. (Volcker chastised Reagan for his deficit spending, leading some members of Reagan’s White House to oppose the renewal of Volcker’s tenure in 1983.) The costs of this policy were passed along to the poor, whose government services were slashed in an attempt to reconcile Reagan’s supply-side doctrine with his opposition to deficit spending. Reagan’s legacy can be seen in the fact that both of these phenomena – Wall St’s choice of speculation over production, and the government’s choice to slash social services to make up for the resulting lack of growth – are very much alive and kicking today, with a Democrat in office. The driver’s seat of the US economy remains as poorly coordinated today as it was in the 1980’s.
Greider uses the effective image of a car with two drivers to describe how this internal conflicts played out. Reagan’s support of Volcker’s monetarism continually applied the brakes to the economy in an effort to control inflation. At the same time, his tax cuts stepped on the gas, stimulating the economy through a logic of addition by subtraction that Greider compares to a kind of Keynesianism for the rich.
“Given the opportunity, both sides exercised their particular powers over the economy in the extreme because, for both, it was politically rewarding to do so. Elected politicians got to do the ‘fun part’ of politics – cutting taxes and increasing spending and creating new government ventures. The Federal Reserve won applause from its audience, the bondholders and associated institutions, when it imposed excessive punishment on the economy. Neither side had either the capacity or the incentive to seek balance…Congress could not control the brake – money and interest rates – but the Federal Reserve could not control the accelerator – the fiscal stimulus provided by federal spending and tax law…It was not one side or the other that was responsible for this instability, but the unnatural relationship itself.” (532-3)
Greider summarizes his analysis of the lack of coordination in financial policy by comparing this complex dynamic of political economy by comparing it to a phenomenon that any reader can easily understand: the inner workings of a dysfunctional family. The chapter “The Turn” identifies the White House, Congress and the Fed as the central members of this family, which also includes the press and, ultimately, the public. He looks at Reaganomics through the lens of a kind of pop psychology that performs a blunt surgical operation that makes up for what it lacks in style with a striking kind of accuracy you have to grudgingly admire.
“The emotional reality of this governing arrangement resembled the warped relationships present in a neurotic family…Like a family trapped in neurotic relationships, the various power elements of the government persisted in repeating obsessive patterns of behavior, playing out the same conflicts over and over again….The father figure…was the Federal Reserve. Personified by its chairman, the Fed presided uneasily over an unruly dinner table of errant children…Congress and the Executive (and the private economy they represented) played the irrepressible adolescents who went as far as they could, tempting the heavy hand…As a clinician might observe, the pattern of behavior seemed neurotic because nobody seemed to learn anything from these experiences….The politicians impulse for unbridled economic stimulus escalated and was met by a still heavier hand from the father.”
“The other neurotic element was more perverse: the father did not impose his discipline equally on everyone in the family. The punishment instead was aimed selectively at certain weaker members of the society. In troubled families, the phenomenon was known as scapegoating. (I would say, the role of the identified patient.) One child in the family would be implicitly singled out by others, both parents and siblings as the one who would absorb the physical and psychological abuse, on behalf of the rest of the family. The scapegoated child usually accepted his fate, persuaded that his (sic) suffering was somehow necessary for the family’s happiness.”
“The economic liquidation induced by the Federal Reserve followed the same warped pattern. Given the methods of monetary discipline employed by the central bank, the economic losses naturally fell heaviest on the weakest and most vulnerable. The economic scapegoating – the disproportionate suffering by labor and smaller enterprises and, indeed by the poorer nations of the world – was useful to the others. It allowed the father – the Federal Reserve – to exercise his authority without having to challenge genuinely powerful interests that might successfully resist.” (532-3)
Greider compares his proposed resolution to this impasse – the incorporation of the Federal Reserve into the government as an entity directly overseen by Congress – to the solution to the problems of a neurotic family: “the children must grow up.” It’s been done before:
“A reformed system that compelled the coordination of fiscal and monetary policies – and created direct political accountability for the results – was hardly a radical idea, except perhaps among the governing elites of America in the twentieth (and now 21st) century. After all, most other industrial nations had such an arrangement – a governing structure in which the central bank was subservient to the elected government and the elected government ultimately had to answer for both interest rates and spending, for both growth and restraint. Political accountability and coordination could be swiftly established by simply designating the Federal Reserve as an Agency of the Treasury Department, directly responsive to the wishes of the President.”
Ronald Reagan had the charisma to project a paternal aura that plastered over a lot of serious conflict. But he didn’t have the strength to take this step that Greider recommends. His sunny optimism that he could have his cake (economic growth through tax cuts) and eat it too (eradicate inflation) was stubbornly upheld with a willful ignorance of evidence to the contrary that calls to mind the magical thinking of Western Mythology, that a single sheriff can beat an entire posse of outlaws against all odds.
Grieder writes that “The only rationale offered by the Reagan team as to how its contradictory policies were supposed to meld successfully was a wistful claim that people would change their economic behavior – once their confidence in government had been restored.” (368) Ronald’s Treasury Secretary Donald Regan might maintain that “This will not be some sort of mystical response based on faith and psychology.” But the President’s budget director David Stockman said it best: “The whole thing is premised on faith.”
We haven’t lost our religion yet, 26 years after the publication of Secrets of the Temple. The book predicted as much.
“The combat and instability would continue because its real source was the political contract struck between democracy and capital back in 1913 (when the Fed was created), the implicit decision that democratic politics could not be trusted to act responsibly in the national interest. Therefore, the eternal and responsibilities of elected politicians were permanently curtailed. Put another way, the elected government was allowed to be permanently irresponsible – … protected from its own accountability by the higher authority, the non-elected central bank. The creation of the Federal Reserve represented a great retreat from democratic possibilities. The maturing of self-government was forever stunted.”
Secrets of the Temple shies away from asking a larger question: can democracy and capitalism live happily ever after? Or should they file for divorce?