John B. Judis: Stop Blaming Wall Street: It Isn't the Reason Our Economy is in Shambles
John B. Judis is a senior editor at The New Republic.
As the U.S. economy fails to recover, there is a growing fear that the United States has entered a phase of long-term decline. Conservatives blame “big government” for throttling entrepreneurship; liberals tend to take aim at Wall Street. Rolling Stone writer Matt Taibbi memorably described Goldman Sachs as “a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money.” Among less inventive critics, the term in vogue is “financialization.” According to author Kevin Phillips, who popularized this notion, financialization is “a process whereby financial services, broadly construed, take over the dominant economic, cultural and political role in a national economy.”...
Much of what liberals blame on financialization is a result of profound changes to both the United States and the global economy that date from as early as 1968—well before the onset of financialization. In fact, the growth of the finance sector was partly a product of these developments. It is true that the speculative disruptions caused by financialization have to be addressed if we don’t want to suffer another crash down the road. But, if policymakers truly want to arrest America’s decline in the world and attend to the various ills that have accompanied it, then they must come to terms with the much broader story of what has happened to American industry and global capitalism in the last four decades. Simply cracking down on Wall Street won’t be enough....
THE FOUNDATION OF the postwar international economy was laid at Bretton Woods, New Hampshire, in 1944, when the United States and Britain agreed to a new international monetary system based on the dollar. The dollar’s value was fixed at $35 for an ounce of gold; other countries could only revalue their currencies in relation to the dollar with IMF approval. As long as American industry reigned supreme in the world, and dollars were in demand to buy U.S. goods, other countries had no incentive to exchange their dollars for gold. But, in 1968, the U.S. balance of trade began to plummet. In 1971, the United States imported more than it exported for the first time in the twentieth century. Except for two recession years, the balance of trade has remained negative ever since....
In 1971, President Richard Nixon finally detached the dollar from the gold standard and also stuck a temporary 10 percent surcharge on imports in order to pressure Japan and Germany to raise the relative price of their exports by revaluing their currencies. That December, the United States and other industrial nations tried to restore Bretton Woods with a dollar pegged at $38 per ounce of gold, but the agreement collapsed, and the dollar and other currencies began to float in relation to each other. No one intended that result, nor the instability it introduced into the world economy....
By 1985, Japan accounted for about 40 percent of the trade deficit, thanks to its lower costs, superior quality control, and a trade strategy that used formal and informal barriers to maintain a surplus. Had the Japanese been cashing in their surplus dollars for yen, the value of the dollar would have fallen, and U.S. products would have become more competitive. But the Japanese did not want to see their exports priced out of the U.S. market, so they invested their surplus dollars back in the United States—in Treasury bills, real estate, and factories. This practice, described in R. Taggart Murphy’s The Weight of the Yen, preserved the dollar’s place in the new monetary arrangement, helped finance the deficit, and kept real interest rates low. But it also put domestic American industry at a significant disadvantage....
Washington’s informal arrangement with Japan and China had institutionalized the decline of American industry, and, particularly, of American manufacturing, which found itself priced out of many foreign markets. American firms could only have competed effectively if Washington had abandoned this arrangement. That would have meant, however, recasting the world monetary system and potentially losing some of the advantages of the dollar as a world currency, including the ability to run deficits and to finance military operations abroad without substantial tax increases. It might have also upset America’s post-cold-war strategy in Asia by provoking Japan and China.
But the consequences of retaining the arrangement were profound. There was the erosion of middle-class living standards, for one thing. To defend against fierce competition from abroad, American firms that produced tradable goods and services attempted to hold down wages in part by going on the offensive against private-sector labor unions. (Other firms simply moved production overseas.) As a result, real wages failed to grow much at all in these industries. According to the Economic Policy Institute, average hourly wages for production workers fell 6.2 percent between 1979 and 1989 after having risen steadily for most of the previous three decades. Wages only rose slightly in the ’90s and even less in the 2000s....
Why, then, has financialization played such a starring role in explanations of America’s economic ills? One obvious reason is that the financial crash did turn what would have been an ugly recession into a “great” recession. This sequence of events is an almost exact replay of the Depression, which began with a short recession in 1926, the result in part of growing overcapacity in auto and other industries, leading to the diversion of investment into stock speculation, which led to the financial crisis, which occurred on top of the slowing economy and the growing breakdown in the international economic system. In both cases, the financial crash played the most visible role.
Another reason is the centuries-old tendency in American politics to allow moral condemnation to outweigh sober economic analysis. Picturing bankers and Wall Street as a “parasite class” or as “vampires” is an old tradition in American politics. It goes back to Andrew Jackson’s war against the Second Bank of the United States and to Populist Party polemics against “a government of Wall Street, by Wall Street, and for Wall Street.” And currently it is one of the few ideological bonds between the Tea Party and left-wing Democratic activists. But, just as free silver wasn’t the answer to the depression of the 1890s, smashing the banks isn’t the answer to the Great Recession of the 2000s. The answer ultimately lies in the ability of U.S. businesses to produce goods and services that can compete effectively at home and on the world market.
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