How a Generative Economic Strategy Trumps ‘Trickle-down’

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To understand the relevance and virtues of Barack Obama’s economic vision, we have to look at the long history of struggle between American laissez-faire capitalism and American middle-class capitalism. We are on the verge of what is likely to be a comprehensive philosophical shift in economic policy toward generative investment, which means counting as economic imperatives the resilience and productive expansion of the positive bases of economic growth, i.e. human and environmental health and well-being, resource-density and cyclical models of resource use and reproduction.

We must also eschew, to avoid distraction, filter terms like “socialism” or “big government”, which are for many reasons, useless in the current realities of American economic policy. The government is bigger than it has ever been, and ideologically speaking, the issue is totally incoherent: the most supply-side administration in recent decades has produced the largest expansion of both spending and government power, while the social-services minded administration of the 1990s presided over the largest reductions.

The key is to understand that if the majority of consumers find cash scarce, even those businesses funded by the investor class will also find it scarce, as spending falls away. We have seen concrete proof of this fact in the recent mortgage-related credit crisis. The failure, on a massive scale, of home loans designed to help deliver equity and bargaining power to consumers unable to meet the profit-demands of lending institutions, has drained the middle class broadly of easy credit and disposable income.

Current Trends

Prices have gone up, credit has frozen, banks have closed, and ultimately, the economy sunk into “negative growth”, because the 70% of GDP representing consumer spending could not draw from those now depleted capital resources. The current climate provides us with a kind of acid-test of basic economic theories, including the assumption that “pro-business” market policy could not have a constricting effect on capital. We now see that abundance can produce economic pathologies that lead to widespread scarcity, and prolonged contraction.

The “free market” is really a market-wide conceptualization of economics that has tended to be applied always as a policy that permits the most powerful actors in a given market the maximum freedom to operate without responsible oversight or constraint. It is the misapplication of the market-wide factor—totalizing market policy and imposing harsh realities on those who can ill afford to face them, instead of recognizing the need to generate health across the entire pool of market resources—that has led to this opportunity-choking strategy. By enhancing the “competitiveness” of the most powerful, the focus of market competition is removed to the realm of the most powerful operators; smaller economic entities cannot compete.

Small family farms give way to large corporate agribusiness compounds; small “mom and pop” shops in small towns and big cities alike, are outmaneuvered by conglomerates with efficiency protocols, massive marketing budgets and economies of scale, to help them undercut sustainable local prices and reinforce their dominance. The result tends to be a process of consolidation and the effective closing of the market under the influence of ever-fewer powerful actors.

A true open market is one in which not only those who have most successfully concentrated power in their hands are free to compete, but the lone individual can find capital, establish an enterprise of just one or a handful of people, and compete for local market share in a fair and viable way. This keeps capital moving more freely and generates a broader base of prosperity, upon which a market for goods and services can be optimized to suit the needs and interests of consumers. In such a scenario, a business achieves vast success not by exerting influence over the levers of power—usually artificially made available to them via selective deregulation—, but by best meeting the needs and interests of consumers. That has to include doing so within a policy framework that privileges those needs and interests — for instance, protecting public health and environmental sustainability, while preventing criminal activity: three performative urgencies which when neglected serve as a serious drag on the sustainability of dynamic growth.

There is nothing “socialist” in these regulatory aims, but rather the principle that a free market is a market in which all actors are enabled. Both President-elect Obama and Sen. McCain have consistently claimed their economic policies, rooted in reforms to the tax code, put general prosperity ahead of ideology, and aim to achieve economic growth that benefits all. The question all along was how they planned to do so, and how their vastly divergent visions fit into this moment in American economic history.

A Brief Political History 

Ronald Reagan and George H. Bush gave us 12 years of laissez-faire supply-side economic policy, aimed at feeding the investor class —not a permanent social “class” per se, but the group of people and institutions whose wealth is tied up in private investments— as much capital as possible, to spur investment and eventually achieve a “trickle-down” effect, where that capital reaches the average consumer. The result of that redistributive program, coupled with aggressive deregulation was a stock-market crash, banking corruption and a recession that ended the first Bush’s tenure in office.

Pres. Clinton redirected tax policy to give more breaks to working families, shift the tax burden back toward the wealthy and reduce education costs, making opportunity more broadly available. This coincided with a technology investment boom that revolutionized global society and the US economy, helping to create 22 million new jobs and swell government revenues without massive tax increases, leaving unprecedented budget surplus projections for his successor. “Irrational exuberance” about dot-com stocks and excessive deregulation led to a dot-com correction, but the overall long-term outlook was sound.

The main task of the moment was to reinvigorate the ailing “rust belt”, the industrial heartland of Ohio, western Pennsylvania, and Michigan, which was suffering serious decline in well-paid manufacturing jobs. This problem was ignored in Washington, DC, and Pres. Bush—motivated in part by ideological assumptions—implemented a $1.7 trillion tax cut, directed mostly at the wealthiest of Americans.

Blue-collar and middle class jobs, generally, have suffered major setbacks in recent years, to the extent that the average American household income has dropped $2,000 since 2001, and a common complaint of laid-off factory workers is that it would now be impossible to find any work that pays more than half what they used to earn. Fully one-quarter of the population of the state of Ohio is now on food-stamps, a very dire measure of the times, from the nation’s industrial heartland.

Overseas outsourcing, generalized deregulation and logically incoherent accounting practices, abetted by predatory financial practices, have severely damaged the spending power of the consumer class—those whose biggest contribution to GDP is consumer spending—, undermining the ability of consumer-sector businesses to continue creating new jobs.

The fundamental societal ill of predatory lending has been misunderstood, because no one seemed to be paying attention to how such practices target the capital that makes a business relationship viable, extruding it and undermining long-term value. The result is a record high in bankruptcies and home foreclosures. Over 1 million homes will be in active foreclosure by the end of 2008. In September, foreclosures were 70% more than one year earlier, and speculation continues to range between 6 to 20 million likely to be in jeopardy, depending on the viability of financial institutions, their ability or willingness to renegotiate, and other economic pressures, like mounting job losses.

Supply-side Distortions

One of the fundamental assumptions of the supply-side strategy is that the average consumer is actually and problematically “invisible”: there is no way to directly encourage or track their investments specifically and so no way to attribute growth to their behavior. This is also partly rooted in the false assumption that the average consumer is erratic, emotional and inconsistent, that his or her motivations are mysterious and impossible to predict.

This whole line of thought is absurd, of course, first of all because consumer spending is measured in excruciating detail and accounts for most of our GDP, therefore it is not at all invisible or unaccounted for, and second, because the average consumer spends what he or she can, not according to random emotion but according to the survival instinct. Here it becomes necessary to understand the constrictive nature of a supply-side vision, as opposed to the generative economics of empowering a dominant middle class, emboldened with real long-term opportunity.

We need to begin re-learning that the survival instinct plays a role in decision making, and that “demand”, as an economic force, is intimately linked to the information that instinct provides the consumer: if you have enough, spend more on unnecessary add-ons, luxury vacations or expensive schools; if you have less, make sure you can eat and have shelter first, then look at new spending. Demand may be staple demand, for life-sustaining goods and services, or it may be luxury demand, for those goods and services sought as a matter of choice or taste, because there is enough disposable income to warrant such “demand”.

The supply-side style of the current US administration has been dangerously narrow-minded and still less useful than the theories at its base: incentivizing the supply side somehow morphed into an almost paranoid notion that incentives would not be enough, the economy had to be newly engineered to virtually guarantee higher short-term revenues for certain industries, or somehow they would stubbornly refuse to follow what the supply-side theory assumes to be their own self-interest. This distortion can be attributed to the over-active influence of lobbyists on government, but also to a fundamental lack of understanding of economics and of markets.

Markets are not designed to create a permanent wealth pyramid; their nature is to make and unmake wealth, according to shifts in consumer behavior. Consistent non-volatile upheaval is the desired state of health, i.e. balance, sustainable generalized prosperity, multi-directional wealth creation, fairness and competition-based turnover in market leadership, with room for new entrants.

The Generative Response

A generative economics seeks to tap into the more democratic nature of markets, not for the concentration of wealth, but for the dissemination of prosperity. It aims to establish mechanisms for protecting genuine manifestations of conumser-oriented innovation and systems serving the public good—the status of which is itself a major economic driver—, keeping market leaders honest, preventing collusion, corruption, distorted accounting practices and non-generative (i.e. predatory or parasitic) commecial behavior.

While we are constantly warned by strict supply-siders that “this is not the time” to work on fixing problems as grave as healthcare, that we need to make sure as much government investment as possible—including tax breaks—goes to the “private sector”—read: corporate sector—, the generative approach examines in uncomfortable detail the degree to which unsustainable costs in healthcare—or energy, food or education—might be building dangerous pathologies into an increasingly inviable economic model. That information allows us to then look seriously at what restoring economic prosperity means, and a big part of what it means is that we must in the present moment, starting from where we actually find ourselves, address the problems that are holding us back and threatening our future wellbeing.

To continue building into the future of the American economic system the most basic and pervasive failures of that system is not only ill-advised and fraught with danger, it’s logically incoherent. You cannot say the patient is in good health, if you leave his heart on the verge of cardiac arrest.

There needs to be a certain amount of volatility, in order for profits to be workable, for investments to be able to find new terrain, for dynamic shifts to occur and for real individual freedom to exist alongside the freedom of capital to support a non-authoritarian structure in civil society. But the freedom of capitalist juggernauts to do as they please, without helping to bring any of the other necessary benefits of a market system, will not reinforce democracy or build a stronger economic future.

Burning finite resources in order to power expensive luxury vehicles or do long-term harm to the natural environment, within which all human activities must occur, by default, is not a generative process and requires heavy-handed protective measures to allow it to compete in a market where better ideas exist. Powering our entire economy without burning anything is possible, but lacking a generative approach that privileges wise resource use over the lust for hyper-exploitation of existing methods, we will not get there.

American infrastructure will need around $1.6 trillion in public works in order to be brought up to date and secured against collapse or failure. Global climate change is now too far along to further put off a swift transition to a clean energy economy—this must be done across borders with deliberate haste—, and is already building steep collateral costs into nearly every aspect of the standard industrial economy. And healthcare and education are reaching prohibitive levels of expense, beyond which not only will services be dangerously scarce, but what services there are will drain our economy of both health and know-how.

Building the opportunity to exploit each of these resources in a sustainable way, into our overall economic outlook, is a necessary step for bringing American democracy—and humanity generally—into the 21st century. The quality of action engaged by governments will determine not only whether such ideas are workable, but to what degree individual human beings are really free to choose their destiny in a world increasingly driven by mass crises and resources scarcity.

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Originally published November 7, 2008, at TheHotSpring.net

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