THE RECKONING, I
The problems and evidently adverse prospects of the American economy and polity and of the position of the United States in the world have not escaped notice. On the contrary, they have sustained a large literature of varying competence and insight, all of which has one significant feature in common: all expresses faith in change and correction. These will be the natural outcome of an informed public and eventually of a wise and determined leadership. In consequence, any contemplation of the present American position, however depressing, always sees a better future. One does not, should not, doubt the self-corrective capacity of democracy.1
The difficulty with this assumption will be evident. We now have democracy—a democracy of the contented and the comfortable. The comfortable monopolize or largely monopolize the political franchise; the uncomfortable and the distressed of the poor urban and rural slums and those who identify with their bad fortune do not have candidates who represent their needs and so they do not vote. As has been emphasized, the democracy of contentment is the policy of the untroubled short run, of the accommodating economic and political thought and of a separate and dominating military power. Its foreign policy, devoid of the financial support that was decisive in the past, is heavily dependent on the military and, in keeping with a well-established tradition, is recreational rather than real.
The ancient call to the doctor to “heal thyself” is notably without effect if the doctor, so far from admitting disability and disease, affirms his own full feeling of health. What then is the future?
The leading prospect for change is of some development inherent in the sustaining structure of contentment, one that would drastically challenge the latter and force a new view of society. Attention in the future, as in the past, will be on leaders and legislatures and on the changes they initiate or should initiate. Reality will be with the events that would destroy the mood of contentment. A similar, though rather more restricted mood in the 1920s—the years of Calvin Coolidge and briefly of Herbert Hoover—was brought to an end by the Great Depression. Without the Depression there would have been no Franklin D. Roosevelt or New Deal. Without the attack on Pearl Harbor and Hitler’s insane declaration of war on the United States, Roosevelt’s effort to help—and save—Britain would have been greatly delayed and would quite possibly have been ineffective. Dwight D. Eisenhower did not bring to a close the twenty years of Democratic dominance of American politics; that dominance was ended by the Korean War. Eisenhower’s very wise role was simply to promise to stop the conflict and escape the death and stalemate in that faraway country. John F. Kennedy and Lyndon Johnson were not the true source of the great movement to civil rights in the states of the erstwhile Confederacy. It was the result, instead, of the violent and nonviolent explosion from below, which challenged the culture of contentment in the South and led on to the remedial legislation. Neither President, however well intentioned, could have acted in the absence of that revolt. The war in Vietnam was brought to an end not by the enlightened vision of Richard Nixon, Gerald Ford and Secretary of State Henry Kissinger, but because it threatened the comfort of a younger generation, and in particular that of its more affluent members who did not wish to fight. There had been grave concern in the United States about the safety of nuclear power generators long before the accident at Three Mile Island, but the latter, at least for a time, effectively ended further investment therein.
The present age of contentment will come to an end only when and if the adverse developments that it fosters challenge the sense of comfortable well-being. As well as the strong and successful political appeal to the disadvantaged I have already mentioned, there are three other plausible possibilities as to how this will happen. They are: widespread economic disaster, adverse military action that is associated with international misadventure, and eruption of an angry underclass. To these I now turn. The economic prospect is the concern of this chapter; the more violent possibilities are in the next.
It is abundantly clear that the short-run economic policies of contentment, protected by the accommodation of economics to comfort, could bring eventual economic discomfort. In the second half of 1990, the economy of the United States entered upon a severe recession. This spread to her trading partners, notably to Canada but also to Europe and beyond. Some of the difficulty was attributed conveniently, even imaginatively, to the prospect and then the actuality of war in the Persian Gulf. That the primary responsibility lay with the immediately preceding economic policy is not, however, in doubt. The mergers and acquisitions and leveraged buyouts had left corporations with a heavy burden of debt and interest payments, and the more extravagant cases lapsed into bankruptcy. Those that escaped all but automatically cut new investment (including that in research and development) in order to remain solvent. There was a further and implicit brake on business investment and also home building because of the decade-long reliance on monetary policy—the effort by the Federal Reserve Board to control inflation with high real interest rates. (It is, to repeat, by limiting investment expenditure and borrowing by consumers that monetary policy acts against inflation.) These high interest rates did not, however, restrain extreme speculative activity in commercial and luxury residential building, and when the collapse in that area came, it left the banking system with heavy losses. The solvency of numerous banks was threatened, a good number failed, and lending was curtailed by all. Some large insurance companies were also similarly affected, those that were heavily encumbered with junk bonds and diversely bad loans. Meanwhile the savings and loan larceny and collapse dried up a further source of funds for real estate purchase and development and left a heavy overhang of questionable properties to find a market. The ultimate effect was a deep depression in the construction industry, producing therein nearly total unemployment in some areas. Unemployment in other occupations showed a marked increase as both consumer and investor confidence diminished.
The long years of high budget deficits when they were not needed made it seemingly impossible to initiate stimulating public expenditures when they were now needed. The celebrated tax reductions for the upper-income brackets and the accompanying economies in welfare distribution had substituted the discretionary spending of the rich for the wholly reliable spending of the poor. A reasonably equitable distribution of income is thought by individuals of liberal disposition to be politically virtuous; in fact, it is economically highly functional.
In the years of contentment there had also been a sharp curtailment of central government support to state and local governments. This was plausible: federal aid to these governments exposes their services and the cost of those services to the federal income tax, and protection from that levy is central to the culture of contentment. With the recession, accordingly, the states and localities were faced with the choice of raising their more regressive taxes, cutting services that were meant extensively for the less privileged and the poor, or doing both. All three courses of action, the subject of great and angry debate, were well designed to make the recession both more painful and worse.
A severe recession or depression could, indeed, shake the political economy of contentment and lead to change. This, as just noted, happened during the Great Depression. And there has long been a lurking fear that it was about to happen again. A small cottage industry existed in the 1980s in the manufacture of books detailing the nature and certainty of a forthcoming economic debacle.2 However, economic prediction regularly outruns the available knowledge, and this could be the case here. A severe depression as the end of the age of contentment is even now far from certain.
There is, first of all, the undoubted fact that many people could sit quietly in comfort in the worst of times. So situated, they would not, at the very least, respond with enthusiasm to the measures that would alleviate economic adversity and its painful effect on others. It is unfortunate that human feeling is not more sensitive, but so it is.
In the 1930s, the community of well-being powerfully resented the ameliorating measures promulgated by Franklin Roosevelt. He came to office in 1932 partly on the strength of a powerful promise to balance the federal budget and otherwise batten down the hatches for the then still comfortable. In this respect, as I have earlier indicated, his election involved a substantial measure of deception, and in ensuing years he was pilloried as no President has been since for his failure to keep the faith; he was widely called a traitor to his class, the class being then smaller but fully as contented. The American Liberty League, a business and financial convocation that identified freedom, as so often, with privileged affluence, came into existence solely to oppose him. Of the Social Security Act of 1935, the most durable and important of the curative actions, a leading congressional spokesman for the opposition said, with no intended exaggeration, “Never in the history of the world has any measure been brought in here so insidiously designed as to prevent business recovery, to enslave workers, and to prevent any possibility of the employers providing work for the people.” A no less fervent colleague said more succinctly, “The lash of the dictator will be felt.”3 The Roosevelt revolution succeeded only because the deprived, supported by the socially concerned, became the electoral majority in the 1930s. What is important to remember as a lesson from those distant years is the number and unyielding opposition of those whose comfort was invaded or seemingly threatened.
In the half century and more since the New Deal the position of the contented has been greatly strengthened, and very specifically, by the measures then so vehemently resisted. These protective programs for the aged, the ill, the farmers and the depositors in financial institutions have already been adequately detailed.
One of the still-acknowledged threats to contentment is inflation. Unlike the effect of declining output and unemployment, its effect is felt across the full spectrum of the economy, and it thus threatens a considerable proportion of the contented, especially those who live on fixed incomes or investment return and those with money to lend. In the age of contentment the prevention of inflation has therefore, plausibly and predictably, become a special concern, although that fact is little remarked.
The adverse effect of recession, on the other hand, is more limited and specific. The unemployment it produces is the primary affliction, but that is something that can be ignored by those not so affected. In the recession of the 1990s, although some millions exhausted their unemployment benefits and coverage had been greatly narrowed by the movement of workers from larger industry into small service enterprises, the pain from unemployment was for a long time not much discussed. The role of interest rates in preventing inflation, in contrast, remained central to all reputable economic discussion.
However intervention by the state may be condemned in the age of contentment, it has been relatively comprehensive when the interests of the contented are involved and relatively limited when the problems are those of the poor. In consequence, one may reasonably conclude that a recession or depression is much less likely to trigger redemptive government action than in the past. Intervention to provide employment and alleviate enhanced poverty and suffering is far less likely than hitherto. The contented electoral majority is or has been made relatively secure; it can watch the adversity elsewhere with sympathy but with no strong call for corrective measures. The recession of the early 1990s was a demonstration of the point. Proposals for compensatory action and mitigation of the newly inflicted hardship were for many months sketchy in the extreme and for long won little backing from either political party. The suffering, physical and psychic, was not wholly denied, but it was deemed to be caused by a normal and self-correcting aspect of the system, and from this came the promise of a prompt recovery. In an interesting recapture of the 1930s, the only declared therapy to relieve the hardship became oratory—the promise from Washington that the recession, however disagreeable for those affected, would be shallow and short. Joseph Schumpeter’s view of recession and depression as therapeutic was not quite revived; instead, the yet more ancient view of the inevitability and automaticity of the cyclical process was substituted. This became the consensus; the contented were still in control.
Recessions do not come to an end in any easily predictable way, but there are, with time, outside influences that support a return to better economic conditions. Inventories are exhausted and must be replaced. The fears of consumers dull; those who are still solvent return to the dealers and the stores. Most important is the distinctive nature of the financial mind; this rather remarkable manifestation of human intelligence is characterized by a very short memory span. In consequence, the recollection of the economic effects of past disaster that has occurred because of past errors of optimism eventually dissolves. In its place comes a new confidence in the unique and extraordinary genius of a new generation; the impression of such genius is always held most strongly by the favored individuals of themselves. Usually there will be some variant in the speculative object or emphasis—as in the past, enthusiasm moving from program trading in securities to commodity futures, to stock options, to junk bonds, to urban real estate, to art. The enduring fact is, to repeat, the delusion of the financial mind along with the popular illusion, in spite of evidence strongly to the contrary, that association with large sums of money denotes economic insight. This insight is regularly ascribed to the greatest of bankers and is known to survive until the day when a sizable provision for loan losses is announced and impressive error must, in effect, be conceded.
Thus the chance is that recessions and the causative speculation will continue to be self-corrective just as error continues, with time, to subsume error. But neither can the possibility of enduring recession or depression be ruled out. Of some things we do not know.
A higher probability for the American economy is more gradual but more definitive stasis. This is already well under way as American manufacturing industry and the economy generally concede to the superior economic performance of other nations, principally Japan, Germany and the countries on the Pacific Rim. Important in this process are macroeconomic policies, those involving capital investment in particular. In the United States such policies are, as already noted, oriented to contentment, whereas in the economically more aggressive countries they serve business investment much more positively. There the military establishments also make a far lower claim on capital and highly qualified manpower, and, over all, there are attitudes and policies that serve aspiration as opposed to contentment. The plausible economic future for the United States, within the narrow limits that economic prediction allows—a limitation always to be stressed—is one of sadly deficient and erratic performance. Whether its effect will be severe enough to invade the basic contentment cannot be told.
1 There are exceptions. My alert and perceptive colleague Robert B. Reich observes that “without the support of the fortunate fifth [of the population], it will be almost impossible to muster the resources, and the political will, necessary for change.” The Work of Nations: Preparing Ourselves for 21st-Century Capitalism (New York: Knopf, 1991), p. 251.
2 The leading practitioner, Dr. Ravi Batra, found a very large audience for his volume The Great Depression of 1990 (New York: Simon and Schuster, 1987).
3 The two spokesmen were, respectively, Representatives John Taber and Daniel Reed. They are quoted in Arthur M. Schlesinger, Jr., The Coming of the New Deal, vol. 2 of The Age of Roosevelt (Boston: Houghton Mifflin, 1958), p. 311.