Abstract
Social structure of accumulation (SSA) theory suggests that economic growth in capitalist countries is characterized by lengthy periods of relatively vigorous growth, often amounting to several decades, followed by lengthy periods of relatively sluggish growth or stagnation. The periods of vigorous growth are marked by institutions that taken as a whole are favorable to the accumulation or investment process. The internal contradictions of those institutions, interacting with changes in the external environment, eventually bring the period of prosperity to a close. At that point, a period of intense social conflict is ushered in, accompanied by economic stagnation, until a new set of institutions that favors accumulation can be established. The neoliberal era, from 1980 to 2007, represents a distinctive period of capitalist development in the United States, one with its own characteristic institutions. This essay examines the major institutions of the neoliberal era and their internal contradictions. It shows how these led to the financial crisis of 2007-2009, and examines the conflicts exposed by the crisis. The essay attempts to bring together an empirical account of the financial crisis with a theoretical framework in which the crisis can be most readily understood.
Keywords
In December 2007, the United States entered into its most severe economic downturn since the Great Depression, with the resulting crisis spreading rapidly throughout the world. Indeed, Ben Bernanke, the Federal Reserve Chair, indicated that in the absence of timely interventions on both the monetary and fiscal fronts, a second great depression might well have been the outcome. Even with those interventions, the crisis set in motion a series of U.S. policy and institutional changes, still unfolding at the time of this writing (May 2012) that marked the end of the preceding era. While it will take many years to clarify the new direction for the American economy, it is possible now to specify the factors responsible for the crisis and the factors that will shape the new direction. That is the aim of this essay.
A number of books, articles, and essays have provided accounts of what has transpired. 1 From 1982 to 2000, the greatest secular bull market in U.S. stock market history took place, peaking in March 2000. A bear market ensued, intensified by the recession of 2001 and the terrorist attacks of September eleventh in that year. The Fed responded by pushing short-term interest rates down to one percent, with mortgage rates following. In the aftermath of 9-11, homeland security checks made travel increasingly uncomfortable, and Americans responded to low interest rates, dislike of travel, and bad experiences in the stock market by pouring more of their disposable income into housing. The government provided tax breaks for mortgage interest as it always had, and encouraged such government-sponsored entities as “Fannie Mae” to ease their credit requirements and promote the “ownership society.”
Meanwhile, the always-innovative financial sector had found new sources of profit in the home-ownership boom that was taking place. In the past, banks and credit unions had traditionally made mortgages and retained them. In the new era, investment banks and some commercial banks found far greater profit opportunities in packaging mortgages into products like CDOs (collateralized debt obligations) and SIVs (structured investment vehicles). A CDO packages hundreds of mortgages (other debts may be included) and divides them into separate tranches or segments according to their priority in receiving interest payments. All of the payments coming into the CDO are pooled, and the CDO makes payments to the owners of the different tranches, starting with the safest one.
The safest tranche, often 70 percent of the total CDO value, is the first to receive payments but receives the lowest interest rate. Securities in this tranche were usually rated AAA, and its owners would receive the interest due in full as long as at least 70 percent of the expected incoming payments were received by the CDO. The next tranche, amounting to perhaps 15 percent of the CDO, would receive a higher interest rate in exchange for its greater risk; at least 85 percent of the expected incoming payments would have to be received for the owners of this tranche to receive their full interest payments. Another two tranches might split the remaining 15 percent into 8 percent and 7 percent segments, receiving progressively higher interest rates for their progressively higher risk. Since the safest tranche typically yielded 2-3 percent more than comparably rated government bonds, it appeared quite attractive to many banks and insurance companies, including many based abroad.
Conservative investors, including many financial service companies in the industrialized countries worldwide, invested heavily in the “secure” tranches. Investors seeking higher returns and willing to speculate, including some hedge funds, invested in the riskiest tranches. They were reassured by the fact that the CDO holdings were diversified regionally and residential real estate prices in the United States had never declined nationwide since World War Two, which led to the expectation that any mortgage holders failing to pay could be foreclosed on, with their houses sold at a higher price. Meanwhile, the investment banks that originated CDOs could receive fees for setting them up in the first place and continuing fee income from managing them. Some of the biggest investment banks, including Merrill Lynch, set up special units to originate CDOs and proceeded to acquire mortgage brokers to facilitate the flow of new mortgages into them. The risks involved in these new-type securities were not widely appreciated, even by the firms that originated them. Their shortsightedness had consequences; by the end of 2008, the five biggest investment banks in the United States had all disappeared, been acquired, or transformed in form. 2
Meanwhile, house prices soared and speculation became rampant. The disbelief in regulation that characterized the entire era from 1980 to 2007 was clearly apparent in the housing boom of the 2002-2007 period. Chart 1 above shows how the gradual increase in house prices that characterized earlier decades accelerated at that time.
U.S. House Prices, 1970-2011.
Various factors contributed to the sharp increase in house prices. Mortgage brokers were regulated by the states and faced little or no regulation in most places. Home purchasers and speculators often did not have to document their income, and it became common to demand little or no down payment. Interest rates were often set at extremely low “teaser” levels, with buyers assured that they could refinance with fixed loans at favorable rates within a few years. 3 The contrast with earlier financial periods was stark. For homebuyers in the middle of the twentieth century, a 20 percent down payment was standard, together with proof of an ability to afford the monthly mortgage payments. During the housing bubble, half a century later, mortgage brokers could easily sell all of the mortgages they produced to financial firms managing CDOs. The CDOs, meanwhile, were rated by rating agencies 4 that were being paid by the same companies producing the CDOs. This meant that the rating agencies had an interest in providing their customers with the investment grade ratings that the latter sought, even though the purchasers of the “investment grade” securities would later find that they had been over-rated. 5 The arrangements between the firms initiating CDOs and the ratings agencies reveal a clear conflict of interest, but it was one that was not endangered prior to the financial crisis by any regulatory limitations.
When the housing bubble burst, beginning in 2007 (housing prices had begun to decline in 2006), the first large group to default on their mortgages was the “flippers,” the speculative purchasers who had planned to hold on to their houses for a short time and then sell them at a profit. The next group was the subprime borrowers, usually people with poor credit histories who lacked the income for regular, fixed-rate mortgages. Their mortgage interest rates typically rose sharply after a brief period of “teaser-rates,” usually two years, with the new rates much higher than they could afford. Many of these people had been assured that they could always refinance in the next two years to lock in fixed low rates. Overlapping with the sub-prime problems were the “alternate-A” borrowers. These were borrowers who did not provide evidence of income or net worth, all of which was possible in the lax regulatory environment. Finally, as the recession worsened, even credit-worthy borrowers began to default in large numbers as unemployment rose strongly, hitting 10.2 percent of the labor force in October 2009, remaining at 9.5 percent or higher through the first three quarters of 2010, and still at 8.1 percent at the time of this writing in early May 2012. Since the U.S. unemployment figures do not include involuntary part-time employment or the discouraged workers who would like to work but have given up looking, it seriously understates the true level and impact of unemployment. 6
The housing crisis made conceivable the collapse of the entire financial sector. Commercial banks typically have about 10 percent of their balance sheets covered by equity. That is to say, if 10 percent of the loans banks have extended are not repaid, they will literally be bankrupt. Long before that, the regulators require banks to raise additional capital. If they cannot, they will be taken over by the authorities and their branches turned over to a healthy bank. The “big five” investment banks more commonly operated with only about 3 percent capital. In the spring of 2008, Bear Stearns’s sale to JP Morgan Chase was forced by the government when it could not raise needed equity and its customers stopped dealing with it. When a similar crisis faced Lehman Brothers in September 2008, the government decided to allow bankruptcy. 7 At that point the meaning of “too big to fail” became clear.
In the financial sector, “counterparty risk” is a major concern. That is to say, if two parties make an agreement, but one cannot fulfill its obligations, the failure of that counterparty can damage severely the financial firms that dealt with it. A major new area of financial innovation, bond insurance, makes clear the potential consequences of such failure. The volume of bond insurance grew like wildfire starting toward the end of the twentieth century. A company that holds the bonds of another company can buy insurance on the interest payments and principal that it expects to receive; this is called a credit default swap (CDS). If the issuer of the bonds defaults, the buyer of a CDS is compensated by the seller. “Between 2000 and 2008, the market for such swaps ballooned from $900 billion to more than $30 trillion.” 8
Bond insurance sounds like homeowner’s insurance, but it differs in an important way. In the latter case only the homeowner can buy the insurance. CDSs, however, can be purchased for speculative or hedging purposes as well by firms that do not own the underlying bonds. It is as if someone in Los Angeles could buy fire insurance on his own house, but speculators in New York, Toronto, London, Zurich, and Hong Kong could buy insurance on the same house. In that way, the amount of bond insurance outstanding at the end of 2007 was much greater than the value of the underlying bonds, with the more than $30 trillion of outstanding CDSs held by companies dependent on the ability of counterparties–those who sold the CDSs–to make good on their contracts.
Several major financial firms, including Lehman Brothers and AIG, the world’s largest insurance company, believed they had found a bonanza in selling bond insurance. They could receive payment for the insurance they were promising to provide, but never believed that corporate icons such as General Motors or companies like themselves could fail. As long as that remained the case, receiving the insurance premiums was like receiving free money. However, they both did fail, with AIG being largely taken over by the U.S. government and Lehman Brothers becoming bankrupt. When that happened, the CDSs they had sold lost much of their value. 9 When Lehman entered bankruptcy and AIG was endangered in September of 2008, the financial markets froze up: major financial firms, fearing counterparty risk, refused to make loans to one another. At the same time, the commercial paper market, widely used by most major firms for their short-term financing needs (since it is much less costly than bank loans), froze up as well. The collapse of the entire financial system–and the spread of that collapse to the real economy–became an imminent risk.
To address that risk, the Fed and the federal government took unprecedented steps. Their objective was not to bail out Wall Street or the banks, but to prevent a broad-based economic collapse. When credit freezes up, that means that loans become unavailable. For individuals, it would mean a world without credit cards, home mortgages, auto loans for leasing or purchase, and the disappearance of all forms of consumer debt. For retailers, it would mean a dramatic collapse in sales; for manufacturers, a collapse in final sales; for any business requiring credit for any purpose, an inability to continue functioning. Such a systemic crisis could have led to the collapse of the U.S. economy and would have reverberated throughout the world. In short, Great Depression II could have rivaled Great Depression I for the severity of its impact.
Business cycles are a normal feature of capitalist economies. That is to say, cyclical downturns are to be expected. Systemic crisis is another matter. We can say that the capitalist system enters a stage of crisis when marginal adjustments (like lowering interest rates or raising government spending moderately) are no longer adequate to restore the system to smooth functioning, when institutional change becomes necessary as a condition for system survival. In the United States, previous crises were encountered in the Great Depression of the 1930s and the stagflation of the 1970s. In both instances, deep and widespread institutional changes were needed to restore prolonged periods of vigorous economic expansion, changes that made the ensuing periods dramatically different from the capitalist system that preceded them. In this sense, we can say that capitalism as a system survives by repeatedly reinventing itself.
1. Social Structures of Accumulation (SSAs)
A social structure of accumulation (SSA) is the set of institutions that enables a capitalist country to grow vigorously. 10 Although “accumulation” is a classical economic term that embodies both saving and investment, for most purposes it can be used interchangeably with investment or the increase in capital stock. When capitalists or firms invest, they of course take into account the expected profit rate. But even very high expected profits are insufficient if the institutional environment is considered deficient. Firms expect a legal system that will enforce contracts; they require an educational system that will provide workers with the necessary skills; they need patent or other protections for intellectual property; they need assurances that the state will not simply expropriate their property. This set of institutions is the social structure of accumulation or SSA.
When capitalist economies establish an SSA, they characteristically experience prolonged periods of relatively vigorous economic expansion, fueled by high levels of investment and the accompanying technological innovations incorporated in the new investment. Once an SSA is established, it tends to last for a long period of time, often several decades. Eventually, however, all SSAs collapse when their internal contradictions interact with changes in the external environment. When an SSA collapses, economic growth becomes sluggish or stagnant, and a period of intense social strife ensues as companies try to reestablish conditions that are favorable for accumulation, beneficiaries of the old SSA seek to prevent reform, and different groups in the society struggle to attain their goals. This period of strife and struggle continues until a new SSA is formed. This is precisely the situation in which the U.S. economy finds itself in the aftermath of the financial crisis.
If we look at U.S. economic history from the perspective afforded by SSA theory, we can see roughly a quarter of a century of vigorous economic expansion in the United States after World War II followed by the stagflation of the 1970s and a new SSA formed from 1980 until it collapsed in the financial crisis of 2008-2009. Each SSA is supported by a dominant ideology. Neoliberalism, the exaggerated belief in the efficacy of the market system to solve economic and social problems, characterized the 1980-2007 SSA, so it is appropriate to call it the “neoliberal SSA.” By the turn of the century, the neoliberal SSA created a form of capitalism that differed dramatically from the form that existed during the 1950s and 1960s (in the postwar SSA), when Keynesianism–which broadly accepted and justified the expanded role of the government in economic affairs–was the dominant ideology. In the neoliberal SSA, American capitalism reinvented itself once again. The advent of the financial crisis, however, marks the collapse of the neoliberal SSA; it means that a broad set of social struggles is beginning anew, struggles that will be resolved only when a new set of institutions is created. To understand clearly the nature of this crisis and the struggles to which it has led, it is necessary to examine more closely the specific institutions of the neoliberal SSA.
2. The Neoliberal SSA
In considering the institutions that support a period of relatively vigorous economic expansion, it is important to keep in mind that some may have roots in the preceding period while others may be formed and contribute to an SSA that is already established. Since institutions are always in the process of formation and decay, moreover, it is helpful to focus on those that appear to have the most decisive impact on the period in question. With these caveats in mind, seven institutional features of the neoliberal SSA especially stand out: 11
The strengthening of capital relative to labor.
Financial innovation and a change in financial institutions favorable to investment.
Deregulation.
Institutional changes in the nature of the corporation.
Limited government.
Globalization accompanied by international agreements to facilitate international trade and investment.
Capital markets favorable to small, entrepreneurial companies.
An examination of these institutional features should help to clarify the nature of the neoliberal SSA.
(1) The strengthening of capital relative to labor is one of the most distinguishing features of contemporary American capitalism. In the middle of the twentieth century, high rates of union membership and high wages were common in the major industries. The election of President Reagan in 1980, however, marked a sharp shift in the fate of labor. In 1981, President Reagan fired the striking air traffic controllers, signaling that the power of the state would be brought to bear against organized labor. Prior to this firing, it was unthinkable for a major corporation to fire workers merely to improve profits when corporate survival was not at stake, but this event changed public notions of what was acceptable. 12 During the period from 1980 to 2007, union membership and strike activity dropped sharply, real wages languished, and inequality in the distribution of income increased dramatically.
As Table 1 shows, during the neoliberal SSA, the percentage of public sector workers who were union members remained roughly stable, but the percentage of private sector workers declined sharply. As private sector union power diminished even further with the high levels of unemployment brought on by the financial crisis, these trends have continued to the present.
Union Membership in the US as a Percentage of the Labor Force.
Sources: U.S. Department of Commerce, Bureau of the Census (2002) Statistical Abstract of the United States 2002 (Washington, DC: U.S. Government Printing Office), p. 411. James A. Walker, “Union Members in 2007: A Visual Essay,” Monthly Labor Review, October 2008, pp. 29-30. Bureau of Labor Statistics, U.S. Department of Labor, “News Release: Union Members—2011,” January 27, 2012.
The weakness of labor relative to capital during the neoliberal era is reflected clearly in the sluggish wage gains that marked this period. From 1979 to 2007, labor productivity (output per labor hour) rose at an average rate of 1.91 percent for nonsupervisory workers, but real hourly wages of nonsupervisory workers declined at an annual rate of -0.04 percent (Kotz 2009: 308). Herein lies a core contradiction of the neoliberal era. Capitalists or firms are delighted to limit wage increases, for that can be translated directly into higher profit rates. If workers do not earn enough to buy the products they make, however, companies may be unable to sell their full output, with recession (or depression) the result. Charts 2 and 3 show the sluggish income growth and growing inequality that characterized the neoliberal era, both of which tend to restrain economic growth by their negative effects on consumption.
Stagnating U.S. Incomes During the Neoliberal Era.
Growing Income Inequality During the Neoliberal Era.
Despite this contradiction, there are a number of ways to put off an economic downturn, as aggregate demand can be sustained for a period of time by growing exports, infrastructure investment, and an increase in two-earner households, among other means. Perhaps the greatest impact on aggregate demand, however, can come from an increasing use of credit, and this is precisely what characterized the neoliberal SSA. Household debt in particular rose strikingly, increasing from 59.0 percent of disposable income in 1982 to 128.8 percent in 2007 (Kotz 2009: 314). In other words, while real wages stagnated, household debt rose alarmingly, putting the expansion of the neoliberal era on an increasingly fragile financial foundation. When the recession began in December 2007 and the full force of the financial crisis hit in 2008, consumption–which accounts for more than two-thirds of U.S. GDP–could not be sustained, increasing markedly the severity of the downturn.
(2) Financial innovation and a change in financial institutions favorable to investment. Several institutional changes in this area played a major role in the formation of the neoliberal SSA. First we may note the change in the Federal Reserve to focus primarily on minimizing inflation. Although formally the Fed is charged with both maintaining full employment and minimizing inflation, the focus from the time of Chairman Volcker (1979-1987) switched to inflation fighting almost exclusively; this remained the case through the Greenspan tenure and some balance between concerns over inflation and those over unemployment was finally restored under Bernanke when the full force of the financial crisis hit the U.S. economy from 2008. 13
At the beginning of the neoliberal era, in the early 1980s, Volcker’s Fed raised interest rates sharply to slay the inflation dragon, a move required by the fact that inflation had reached double-digit levels at the end of the 1970s. This brought back-to-back recessions in 1980 and 1982, but inflation and interest rates then began a multi-decade decline that created highly favorable conditions for financing economic expansion, with the federal funds rate dropping from an average of 8.9 percent in the 1976-80 period to 2.5 percent in the 1996-2000 period (Lippit 2005: 58). Although the Fed is not a new institution, the change in its functioning made it the equivalent of one.
A second major change in the financial sector is the explosion of financial innovation that took place during the neoliberal era. The CDOs, SIVs (structured investment vehicles), 14 credit default swaps, and other new financial products greatly expanded access to credit, helping to finance economic activity. Once again, however, an understanding of contradictions helps to explain the potential hazards in institutional innovation in the financial sector. First of all, the low and falling interest rates that encouraged rising investment and economic growth also contributed to the formation of bubbles in the stock market (the late 1990s) and the housing sector (the 2000s) that contributed greatly to the collapse of the entire SSA when the bubbles eventually burst. Second, the new financial products were disseminated broadly throughout the financial system, and since the loan originators were not the ones assuming the risk, they contributed to a dramatic drop in lending standards that ultimately played a central role in the financial collapse that marked the end of the neoliberal era.
(3) Deregulation. Regulation imposes additional costs on business, reducing profitability. Such costs range from environmental clean-ups and added paperwork and personnel to required safety equipment and the holding of financial reserves. President Reagan spoke often about the desirability of “getting government off our backs,” and Fed Chair Greenspan explained that he could not conceive of deregulated financial institutions failing to act in their own long-term best interests when freed from regulatory constraints.
Mr. Greenspan admitted that he had put too much faith in the self-correcting power of free markets and had failed to anticipate the self-destructive power of wanton mortgage lending. “Those of us who have looked to the self-interest of lending institutions to protect shareholders’ equity, myself included, are in a state of shocked disbelief,” he told the house committee on Oversight and Government Reform . . . Representative Henry A. Waxman of California, chairman of the committee (asked) “Do you feel your ideology pushed you to make decisions that you wish you had not made?” Mr. Greenspan conceded: “Yes, I’ve found a flaw . . . I’ve been very distressed by that fact.” (New York Times, October 24, 2008)
The ideology of neoliberalism offered support to the idea that an economy would be most dynamic and innovative when freed from regulatory constraints. Indeed, the economy did expand vigorously in the neoliberal era, but once again major internal contradictions appeared. Longer term, global climate change is an obvious problem for any deregulatory regime; it has the potential to wreak enormous damage, transforming human life on earth. In a much shorter time span, however, unregulated markets have the potential to bring a period of SSA expansion to a crashing close, and that is indeed what happened. New financial products were developed and marketed without regulatory scrutiny. Rating agencies paid by CDO creators gave products like CDOs high ratings, creating mistaken impressions that they were safe for investing institutions and pension funds. 15 Bond insurance (credit default swaps) was also free of regulatory scrutiny and also led to huge losses. Meanwhile, institutions that were nominally given regulatory authority like the Securities and Exchange Commission (SEC) were run by people who also did not believe in regulation, and in any event were systematically starved of funds by Congress and successive administrations. 16 Thus the SEC failed to uncover the $50 billion Madoff fraud despite numerous complaints and five formal investigations.
Perhaps most closely connected to the financial collapse is the lack of regulation of mortgage brokers and the entire mortgage underwriting process, enabling people to obtain mortgages who lacked the income and resources to make their monthly payments. Overall, deregulation and inadequate regulation in the financial sector provide another example of a classic contradiction. It helped to fuel a boom in the sector and in the economy as a whole, but the very forces of deregulation that fueled that boom also played a central role in contributing to its collapse.
(4) Institutional changes in the nature of the corporation. Here we can focus on restructuring, downsizing, and re-engineering. All of this involves the rationalizing of corporate activity, and in itself appears capable of raising both productivity and profitability. The rationalizing of corporate structure and organization would not appear to embody major contradictions, but even in this case problems did appear. This happened primarily when the financial sector played the central role in corporate restructuring and other changes. Private equity firms in particular, seeing the possibility for raising profitability through corporate restructuring, often moved in to buy out existing firms. As financial entities, they sought to increase their profits through leverage. Thus they would typically buy out firms and have the firms borrow heavily to pay themselves (the private equity firms) large dividends, even recouping their entire investments in this way. They would proceed to run the indebted firms for a while–during which time they sought further efficiencies–and then seek to sell the firms for a profit. The bankruptcy of Simmons Bedding illustrates the process and its consequences.
For most of its 133 years . . . the Simmons Bedding Company enjoyed an illustrious history . . . Simmons says it will soon file for bankruptcy protection, as part of an agreement by its current owners to sell the company–the seventh time it has been sold in a little more than two decades–all after being owned for short periods by a parade of different investment groups, known as private equity firms . . . .Its bondholders alone stand to lose more than $575 million . . . 1,000 employees–more than one-quarter of the work force–(were) laid off last year. But Thomas H. Lee Partners . . . has made a profit. The investment firm, which bought Simmons in 2003, has pocketed around $77 million in profit, even as the company’s fortunes have declined. THL collected hundreds of millions of dollars from the company in the form of special dividends. It also paid itself millions more in fees, first for buying the company, then for helping run it . . . Wall Street investment banks . . . collected millions for helping to arrange the takeovers and for selling the bonds that made those deals possible. All told, the various private equity owners have made around $750 million in profits from Simmons over the years. (New York Times, October 5, 2009)
Many firms went through numerous private equity owners in this way. 17 There were two important consequences. First, many employees were fired as part of the rationalization process. And second, the firms wound up with enormous debt levels, unable to pay their obligations when the economy or their industries faced inevitable downturns. Thus the combination of private equity and corporate restructuring proved in many cases to be toxic when the current crisis erupted.
(5) Limited government. A central part of the conservative creed that dominated the neoliberal era was limiting government activity, with a commensurate limitation on (or reduction of) taxes. 18 Small government, free markets, and low taxes are usually viewed as helpful to capital and the pursuit of maximum profit. Over time, however, a serious contradiction can emerge. Private capital requires complementary investments in the public sector, especially in education and infrastructure (highways, railroads, ports, and airports, as well as electric power generation and transmission). Failure to make these investments in human and overhead capital will result eventually in falling productivity growth, reducing returns on capital. In the postwar period of SSA expansion, education under the GI Bill, which made college education widespread in the United States for the first time, and the building of the interstate highway system in the 1950s and 1960s, which fostered the building of suburban housing developments and shopping malls across the United States, played a major role in stimulating high rates of investment and economic growth. In one sense, the neoliberal SSA was living off these past public investments, with the small-government credo of the neoliberal era eventually making the foundations of the entire period of expansion increasingly fragile.
(6) Globalization accompanied by agreements to facilitate international trade and investment. The neoliberal era saw a vast expansion of international trade and investment, with the appearance of the World Trade Organization (WTO) and NAFTA playing an especially important role. Globalization reached a new stage during this era, benefiting capital accumulation and economic growth in various key ways. Larger markets reduced unit production costs, increasing profitability. Also, firms were able to benefit by establishing production facilities abroad, using lower-cost labor and serving foreign markets that were often growing more rapidly. Of comparable importance, the outsourcing and off-shoring of jobs reduced labor costs, whether goods were produced for foreign or domestic markets, and threatened U.S. labor with potential job loss (a threat that was frequently carried out), weakening labor demands, cutting wage gains, and raising profitability.
Three contradictions especially can be identified with the spread of globalization. First, problems anywhere in the global system will have global ramifications. Thus, the Asian financial crisis of 1997-98 spread throughout the world, disrupting business globally. Similarly, the U.S. financial crisis affected the entire global economy.
Second, the negative impact on U.S. wages created by off-shoring made the consumption-dependent U.S. economy more reliant on credit and thus more vulnerable when the financial crisis hit. And third, the pattern of globalization in which China and other Asian countries exported consumer goods especially to the United States and piled up holdings of U.S. dollars created an imbalance in global trade that made the entire system vulnerable. Such imbalances cannot endure indefinitely, and one manner of correction would be a prolonged period in which the U.S. economy grows well below trend, cutting its demand for foreign goods and services. All three contradictions held a potential for contributing to the termination of the neoliberal SSA.
(7) Capital markets favorable to small, entrepreneurial companies. In the United States, it is generally much easier for small, entrepreneurial companies to be established and thrive than it is elsewhere in the world. The United States was the first to develop a major venture capital industry in which the venture capitalists would provide the initial funding for start-up companies, expecting eventually to take them public and recoup their investments many-fold. This becomes an important means of introducing new products and technologies, thereby raising productivity, growth and profitability. This is not an institution with major contradictions except insofar as the industry can be given to excess, as was revealed in the 1990s’ stock market boom and subsequent collapse, with internet and other technology stocks especially prominent.
The neoliberal SSA fostered an expansion that lasted from 1980 to 2007, 19 but the contradictions embodied in its key institutions, interacting with changes in the external environment, ultimately played a major role in bringing about its collapse. Of the contradictions discussed, perhaps the greatest weight should be placed on (1) the strengthening of capital relative to labor, which sharply limited gains in real wages and made the neoliberal expansion dependent on a dramatic expansion of household debt; (2) the change in financial institutions which included financial innovations that made companies similarly vulnerable; (3) deregulation that fostered abuse in the financial system; (4) limited government that increased the vulnerabilities of the private sector, allowing financial companies to expand with inadequate capital and new financial products to be introduced without prudential oversight; and (5) the global expansion of the capitalist system that made financial regulation more difficult and that created global financial imbalances.
3. The Crisis
An SSA reaches a crisis state and collapses when its internal contradictions interact with one another and with changes in the external environment. Global financial imbalances are to some extent internal to the neoliberal SSA (as the United States embraced globalization) and to some extent external (dependent on developments taking place outside the United States). Among these imbalances, perhaps that of greatest significance is the one involving the United States and China, with American consumers buying Chinese-made consumer goods, the United States running great trade deficits, and China amassing some three trillion dollars in foreign exchange reserves, primarily in the form of U.S. dollars. This served both countries while it lasted, in that China enjoyed major employment gains while the United States benefited from inexpensive consumer goods made in China (which limited inflation and raised living standards). In addition, the Chinese purchases of U.S. government securities helped to finance U.S. deficits and to keep interest rates low in the United States, which in turn meant low mortgage rates could be sustained (of course this also helped to fuel the housing bubble).
The immediate source of the financial crisis was the housing bubble, with financial innovation increasing the supply of capital for subprime mortgages and creating exotic new securities that were improperly rated by the rating agencies that had a financial incentive to do so and that were not subject to regulation. If we look for “external” triggers for the financial crisis, it is important to keep in mind that in the final analysis nothing is truly completely external, but it is nonetheless convenient to separate out factors that in large measure have external origins. With this caveat in mind, we can focus on the impact of the stock market bubble’s collapse, the ensuing bear market for stocks, China’s joining the World Trade Organization in November 2001, and the 9-11-01 terrorist attacks.
From March 2000 to well into 2002 the stock market declined. This bear market followed an unprecedented 18-year secular bull market that ran from 1982 to 2000. With the riskiness of stocks once again manifest, a large number of speculators turned to housing as a financial alternative. Like the stock market, housing enabled speculators to make leveraged market bets, putting down 10 or 20 percent of the value of their purchases and sometimes even less. Homeowners were also eager to put more funds into their houses. Following 9-11, nervousness about travel grew and air travel in particular became more inconvenient, with long security lines and earlier arrival at airports increasingly required. Many individuals opted to travel less and sink more money into their homes.
Also after 9-11, the stock market collapse, and the recession of 2001, the Federal Reserve Board opted to hold down interest rates to a then-unprecedented rate of 1 percent for a prolonged period of time: into 2004. While the short-term Treasury bill rates affected do not influence mortgage rates directly, the 10-year government bond rates are affected by the short-term rates and in turn do affect the mortgage rates directly. 20 Central bankers are typically too worried about inflation to bring interest rates so low for a prolonged period of time, but the entry of China into the WTO and the flood of low-cost consumer goods that entered the industrialized economies from China in the early part of the 21st century kept inflationary pressures well contained. Thus there was nothing to stop the Fed and central bankers around the world from pursuing low-interest-rate policies. Moreover, U.S. public policy has long sought to promote home ownership, and the George W. Bush administration especially sought to promote the “ownership society,” pressuring government-sponsored entities like Fannie Mae and Freddie Mac, which between them owned or guaranteed about half of all U.S. mortgages, to lower their standards for acquiring or guaranteeing loans.
Thus these “external” factors helped to create the perfect storm for the financial crisis. Financial innovation created mortgage-backed securities (CDOs) and bond insurance (credit default swaps) that were a source of substantial profits on Wall Street. These and similar products were either regulated insufficiently or not regulated at all. CDOs were given investment-grade ratings by firms that were paid by the CDO creators, ratings that made them deemed “secure” by banks, insurance companies, and other financial firms; there was no regulatory oversight over the ratings firms. Limited government meant that government agencies charged with regulation (such as the SEC) were inadequately staffed, and the ideological belief in the efficacy of an unregulated market system let government officials turn a blind eye to the perfect storm that was brewing.
Two of the other contradictions noted–ones stemming from the strengthening of capital relative to labor and from globalization–also contributed to the severity of the crisis. Since–as shown above–real wages were stagnant for much of the neoliberal era, people were increasingly relying on debt to maintain their living standards. An increasing portion of this debt was coming from cash-out refinancing. Someone who had purchased a house for $100,000 with an $80,000 mortgage, for example, could get a new mortgage for $160,000 when the value of the house increased to $200,000. After repaying the first mortgage, the borrower was left with $80,000 in cash, which could be used for any purpose, such as the purchase of a new car or other consumer goods, or paying down credit card debt. As house prices continued to escalate even while interest rates were declining, repeated refinancing became possible. When house prices started to slide in 2006, however, an increasing number of mortgages were “under water”: mortgage debt was greater than the market value of the house. By November 2009, almost 25 percent of houses with mortgages were under water. With consumer purchases–representing close to 70 percent of GDP in the United States–financed by an ever-rising level of debt and houses playing a major role in providing security for that debt, the collapse of the housing market undermined the entire economy. Meanwhile, the increasingly international nature of financial institutions meant that the toxic securities created during the neoliberal era were spread throughout the financial system of the industrialized world.
4. Policy Reaction
The largest financial institutions in the West are deeply intertwined with one another and with the global economy. This means that counterparty risk is spread globally, increasing the financial fragility of the global system. For this reason, there are quite a few global firms that are literally “too big to fail.” That is to say, if the government were to allow them to fail, the consequences would be felt not merely by their shareholders and employees, but by financial institutions and by ordinary people throughout the world, potentially making their collapse the harbinger of a global depression. One of these “too-big-to-fail” firms, Lehman Brothers, was allowed to fail, and this indeed marked the height of the financial crisis. Like other investment banks, Lehman Brothers operated with an extremely small cushion of its own capital, which in the case of Lehman amounted to less than 3 percent of its assets. 21 In other words, Lehman Brothers faced insolvency if its losses reached just 3 percent of its assets. Despite its tenuous capital position, the company was packaging subprime mortgages into securities, selling credit default swaps, and engaging in a wide range of high-risk activities. Its downfall was triggered by a combination of these.
Like many financial firms, Lehman sought to benefit from the “carry trade,” which involves borrowing short term at low interest rates to finance longer-term securities purchases at higher rates (an interest rate differential is common to reflect the added risk–including inflation risk–that longer-term securities typically entail). In the case of Lehman Brothers, however, when other financial firms became aware of its difficulties, they stopped buying its short-term debt. Since it could sell its long-term bond holdings only at huge discounts entailing substantial loss, it quickly sank into insolvency. All of the financial firms that dealt with Lehman suffered losses (or potential losses depending on the outcome of the company’s bankruptcy proceedings) due to counterparty risk. That in turn caused the U.S. financial system to freeze up as even major banks stopped lending to one another, unable to assess the value of other banks’ holdings and afraid that they would not be repaid if the others suffered a Lehman-like fate. This in turn affected the global financial economy. The need for unprecedented government intervention became apparent.
The policy reaction to the crisis that followed the Lehman Brothers bankruptcy involved unprecedented steps on both the monetary and fiscal policy fronts. The Fed pushed its target interest rate for federal funds–the interest rates charged by banks for overnight loans to other banks–to between zero and one-quarter percent, the lowest level in history; in early 2012, the Fed announced it planned to keep interest rates extremely low until at least late 2014. In addition, it moved to guarantee a wide range of other debts, including mortgage-backed securities, and began to purchase longer-term government securities. It also agreed to treat additional firms, such as Morgan Stanley and Goldman Sachs, as commercial banks, entitling them to borrow from the Fed. The Federal Deposit Insurance Corporation increased its guarantees for deposits in covered institutions from $100 thousand to $250 thousand per account. Congress agreed to a $700 billion Troubled Asset Relief Program under President Bush, and then a $787 billion stimulus program under President Obama. Taken together, sufficient financial and fiscal stimulus was injected into the U.S. economy to set the economy on a path to gradual recovery, although in May 2012 the unemployment rate remains at an elevated 8.1 percent and, with economic growth likely to remain sluggish for years, is likely to come down slowly. 22 Moreover, the backlash against government intervention in the economy represented by the Tea Party and other groups will make it even more difficult to introduce further stimulus to the economy, ensuring even greater sluggishness than would otherwise be the case. 23
5. The Recovery Path
In the United States, business cycles since the Civil War have lasted about six years on average. During a recession, interest rates normally fall due to Fed policy and lack of demand for credit as consumers and businesses cut back on their purchases. When the economy starts to recover, deferred purchases on major items like houses and cars spur a rise in demand that is abetted by still-low interest rates. Employment picks up accordingly, and with the rise in incomes, the economy tends to grow at an above-average pace for some time. Following the financial crisis, however, and despite the Fed’s promise to keep interest rates low for a prolonged period, the outlook is dramatically different.
Since real wages were rising at a miniscule 0.49 percent annually from 2000 to 2007 (even while productivity was rising by 2.45 percent annually; Kotz 2008: 308), a sluggishness that is likely to have continued at least through 2011, consumers were able to maintain their consumption levels only by slashing their saving–which fell to 1.5 percent of disposable income in 2005 as Table 2 shows–and relying increasingly on housing and consumer debt to finance their purchases. As a result of the financial crisis and the collapse in housing values, consumers increased their savings rate (personal saving as a percentage of disposable income) from an average of 2.0 percent in the period 2005 Q2-2007 Q3 to an average of 4.8 percent from 2007 Q4-2010 Q1 ( www.newsneconomics.com ); the savings rate rose further to 5.9 percent in July 2010 ( www.bea.gov ). Table 2 shows the decline in the personal savings rate over the course of the neoliberal SSA and the increase following the financial crisis.
U.S. Personal Savings as a % of Disposable Income in Selected Years.
Source: U.S. Department of Commerce, Bureau of Economic Analysis, www.bea.gov/nipaweb/Nipa-Frb.csp .
Further increases in the savings rate over time appear likely as consumers rebuild their retirement accounts and household balance sheets, and as they make intensive efforts to limit their spending and debt (although in the near term such increases may be slowed by the sluggish economy and continuing high rates of unemployment, which force consumers to lower savings to meet essential consumption needs). As a result, consumption growth rates are unlikely to return to earlier levels for many years. With consumption curtailed, business firms will face slower sales growth, reducing the demand for investment, commercial real estate, and inventories. Since many surviving businesses have had a near-death experience or seen others in their industry go under, they are likely to continue to conserve cash and to show great caution in their investment behavior for an extended period. 24 Given the expected behavior of both consumers and business firms, which can be anticipated with great confidence, the United States faces an extended period of sluggish economic growth, just what SSA theory leads us to expect. 25
SSA theory also leads us to anticipate an extended period of intensified social conflicts, conflicts that must be resolved–to a considerable extent–for a new SSA to be formed and a new stage reached in the development of American capitalism. The conflicts are typically quite messy, with a great deal of confusion and multiple parties involved. They are intensified by the holdover power of the previous ideology, in this case neoliberalism and anti-tax sentiment. Some of the main conflicts include the struggles over health care, economic recovery, and the proper role of the state in the economy; the conflict between citizens and corporate interests, including those of the financial sector; the conflict between retirees on the one hand and workers and children on the other; 26 the conflict between environmentalists and producer interests, including especially those of both labor and capital in the fossil-fuel producing states; agricultural/rural interests versus urban/industrial interests; and labor versus capital, especially with regard to free trade and immigration. These conflicts often become complicated by essentially extraneous emotions, such as nativist anti-immigrant sentiment.
When these varied conflicts are sufficiently settled to allow the formation of a new SSA, a new stage in the development of American capitalism, then the economy can once again move into an extended period of vigorous economic expansion. Most recently this took place with the formation of the postwar and neoliberal SSAs. The various social struggles are complicated by the fact that the beneficiaries of the last (neoliberal) SSA typically attempt to prevent change; the old neoliberal, anti-tax ideology continues to have a major impact across society, making needed changes more difficult, and the external environment continues to pose major challenges, with the conflicts in Afghanistan and Pakistan, the difficult relations with Iran, the movement to the right in Russia and Israel, the ongoing European debt crisis, and the growing frequency of extreme weather events associated with the advancing status of global warming. At the same time, it is important to keep in mind that both capital and labor ultimately have an interest in the emergence of a renewed period of economic expansion. Usually, new SSAs are formed after a more-or-less lengthy period of social struggle, but the length of the hiatus is not fixed and there is no guarantee that one will be formed, as the unfortunate case of Haiti–to present an extreme counter-example–demonstrates.
Consider the struggle over health care. Government health care is wildly popular with its current main recipients, the Medicare population, but a large portion of this group opposes new government programs for fear it will negatively impact the resources available for Medicare. Anti-tax groups, including almost all Republicans, are similarly opposed. At the same time, the United States is the only major industrialized country not protecting the health care of all of its citizens (the main provisions of the health care act will not become active until 2014). Further, the lack of government-provided health care played a central role in the collapse of the U.S. auto industry and other major industries, which found their excessive health care costs preventing them from competing in an increasingly global economy. Finally, lack of ongoing reform in health care (beyond the health care act) will impose staggering future costs on the entire economy, with Medicare potentially running out of the funds needed to sustain the current level of benefits by around 2017 and medical costs eating up the entire budget for the United States and the states within a few decades, a situation which is obviously not tenable. A reformed health care system is indispensible for the health of the U.S. economy, but even though initial legislation was approved in early 2010, full implementation is not scheduled until 2014 and struggles over its financing and final shape will continue for years. 27 Moreover, the health care bill that was signed into law is simply a first step, and much more needs to be done to curtail the expansion in health care costs, which remain largely out of control. 28
Another area of ongoing struggle is that between citizens and business, including Wall Street. Many people are properly outraged over the bailouts provided to financial firms during the financial crisis. In general, individuals and small businesses have not been provided bailouts from financial adversity, but some of the biggest financial institutions have been (even though they were the major source of the crisis), and aid has been provided to other major companies in the automobile industry. For the reasons provided, the major banks and insurance companies were indeed “too big to fail,” but there is something not quite right about a system that privileges some companies and allows them to shift losses onto the shoulders of citizen taxpayers while paying exorbitant bonuses to those who meet with speculative success. The problem has been addressed in part by the financial reform bill of 2010, but many of the detailed financial regulations remain to be written, and there is an ongoing attempt by those involved to limit government interference in the financial industry, supported by the remnants of neoliberal ideology. The struggle over the shape of the financial sector especially promises to be a prolonged one.
Social Security and Medicare help to provide financial security for the aged, but are not based on the payments into the system they themselves have made. Rather, each generation pays taxes during their working years for the benefit of those already retired. As the U.S. population ages, however, the ratio of retired persons to those still working increases, making the necessary tax burden potentially intolerable for future workers. 29 Moreover, barring reform, a rapidly increasing share of the tax burden will go for entitlement programs, crowding out all other government programs, such as education, from pre-school and elementary school through college. In this sense, the conflict is not only between the aged population and the working population, but between the aged and children as well.
The environmental arena also presents numerous areas of conflict. If global warming were controlled through a carbon tax or cap-and-trade system, companies and residents in states heavily dependent on the production of fossil fuels, including coal states in the Midwest, would be placed at an economic disadvantage, as jobs and corporate profits in the fossil-fuel energy sector disappear. Businesses in those states that benefit from these industries or from the low-cost energy they provide attempt to forestall efforts to protect the environment. At the time of this writing, opposition from these groups has brought climate change legislation to a standstill. Water conservation presents another major area of environmental conflict, with agricultural and urban interests competing for access to low-cost water. Increasing drought and water scarcity, together with population growth in the Southwest, intensify this conflict.
Finally–and this discussion is meant to be indicative rather than exhaustive–a conflict between labor and capital is usually one of the major areas of social struggle that requires some degree of resolution before a new SSA can be formed. A major area of dispute at this time is that over free trade and international labor movement. The organized labor movement views both as a source of competition for its members, holding down their wages and benefits. Capital, on the other hand, wants the freedom to hold down labor costs by outsourcing and off-shoring, and to bring in workers from abroad if they will work for lower wages or provide skills not readily found in the domestic labor force. In an increasingly globalized world, the protectionist sentiment of organized labor can prevent new trade deals from being reached and render firms less competitive. 30 It is sometimes argued that workers who lose their jobs due to off-shoring can be compensated, but it is often difficult to determine the reason for which job loss takes place and others have pointed out that there is no good justification for treating those who lose their jobs due to domestic competition more shabbily than those who lose their jobs due to foreign competition. One way of seeking compromise in this area would be to make U.S. job-loss benefits more like those of the European welfare states, but that would require higher taxes, making anti-tax sentiment relevant in another area.
Reviewing these areas of conflict is not meant to suggest that other areas of major significance are lacking. Rather, it is meant to demonstrate the breadth of the issues raised when one set of institutions marking a specific SSA collapses, and to indicate the struggles that will have to find some measure of resolution before a new SSA can be established. The financial crisis in the United States marks the end of an era and the opening of a period of intensified social struggles. Sluggish economic growth will characterize this period in any event, since the consumer-driven, debt-financed economy of the neoliberal era is gone. Its replacement will emerge from the outcome of the numerous struggles going on. Although there is no set duration for the periods between SSAs, they tend to be lengthy, as the Great Depression of the 1930s and the stagflation of the 1970s indicate. The key to the establishment of a new SSA will be the creation of a new set of institutions, emerging from the current chaos, that is favorable to the growth process; the new set may include some of the individual institutional components of previous SSAs. The new SSA that eventually emerges will mark a new stage in the development of American capitalism, which endures by repeatedly reinventing itself.
Footnotes
Acknowledgements
The author wishes to thank his student, Anthony De Alwis, for his research assistance and the reviewers of this article–William Dugger, Dorene Isenberg, and someone unidentified–for their constructive critiques.
Declaration of Conflicting Interests
The author(s) declared no potential conflicts of interest with respect to the research, authorship, and/or publication of this article.
Funding
The author(s) received no financial support for the research, authorship, and/or publication of this article.
1
See, for example, Mark Zandi (2009) Financial Shock; Dean Baker (2009) Plunder and Blunder: The Rise and Fall of the Bubble Economy; Joseph E. Stiglitz (2010) Free Fall: America, Free Markets, and the Sinking of the World Economy; 
How Markets Fail; and Andrew Ross Sorkin (2009) Too Big to Fail.
2
In the Spring of 2008, Bear Stearns, on the brink of insolvency, was acquired at a distressed price by JP Morgan Chase; Lehman Brothers went bankrupt in September; Merrill Lynch, believing itself to be next after Lehman Brothers, sold itself to Bank of America instead; and Goldman Sachs and Morgan Stanley elected to be treated as commercial banks so they would be eligible to borrow from the Fed.
3
The story of an undergraduate student of mine at UCR, working weekends to support himself and his parents and with basically no discretionary income, is indicative of the lack of regulation and financial requirements that prevailed during that time. He was able to buy two houses in Moreno Valley for a total of $720,000, paying no money down. His intention was to rent the houses out to support the mortgage interest payments and then sell the houses at a profit. He wound up having to sell the houses at a small loss when the market turned.
4
The main ratings agencies in the United States are Standard and Poor’s, Fitch, and Moody’s.
5
During the financial crisis, the National Association of Insurance Commissioners, representing all fifty states and Washington, DC, “discontinued their reliance on RMBS (residential mortgage-backed securities) ratings issued by firms like Moody’s Investors Service and Standard and Poor’s, and instead hired Pacific Investment Management Company (PIMCO) to do the forecasts.” Bloomberg, September 21, 2010.
6In August 2010, the unemployment rate was 9.6 percent, but if underemployment, which includes involuntary part-time workers and those discouraged workers who have stopped looking for jobs (and are therefore not considered unemployed because they have left the labor force), is added to the official unemployment rate, the “true” level of unemployment (designated U-6 by the Bureau of Labor Statistics) reached 16.7 percent of the labor force in that month ().
7
Federal Reserve Chairman Bernanke claims that the Fed and other government agencies lacked a legal means of stopping the bankruptcy since Lehman Brothers was not a commercial bank. It should be noted, however, that the Fed and U.S. Treasury Department were able to resolve the Bear Stearns situation with a similar lack of formal authority. In any event, the financial reform legislation passed in 2010 now provides the U.S. government with that authority.
8
The New York Times, “Times Topics: Credit Default Swaps,” updated March 1, 2012.
9
It should be noted, however, that subsequent to the crisis engendered by the collapse of Lehman, the U.S. government’s Troubled Asset Relief Program (TARP) covered in full the CDS obligations of AIG.
10
The most illuminating and comprehensive book on social structures of accumulation is Terrence McDonough, Michael Reich, and David M. Kotz, eds., Contemporary Capitalism and Its Crises: Social Structure of Accumulation Theory for the 21st Century (Cambridge: Cambridge University Press, 2010). My own contribution to that volume appears as chapter 2, “Social Structure of Accumulation Theory.”
11
With the exception of one critical addition, these seven features were outlined in my 1997 article in the Review of Radical Political Economics 29(3): 11-21. The addition, included under number 2, is financial innovation.
13
Deeply concerned about the possibility of Great Depression II and/or the United States following Japan’s record of “lost decades” (with economic growth there averaging about 1 percent since 1990), Fed Chairman Bernanke has displayed increasing concern with unemployment since the start of the financial crisis. As of May 2012, this had resulted in two rounds of quantitative easing (buying long-term government bonds as well as the usual short-term ones) and a commitment to keep interest rates very low until at least late 2014.
14
A structured investment vehicle (SIV) is another financial innovation of the neoliberal era. Pioneered by bankers at Citigroup, an SIV enables banks to make loans without setting aside reserves. The SIV sells commercial paper (loans of less than nine months) to finance its higher-yielding long-term investments. It was quite attractive to banks because they could earn ongoing fees from setting up and managing them, but since they did not appear on bank balance sheets, banks did not have to maintain reserves to cover potential losses on them.
15
It should be noted that the rating agencies did not actually investigate the soundness of the individual mortgages held by CDOs. Rather, they used mathematical models to determine the probability of default, a methodology that the lack of regulation may have facilitated.
16
It should be noted that neoliberal ideology permeated the entire culture; it was not only Republican administrations that were influenced by it. The Glass-Steagall Act, for example, which separated commercial and investment banking, was eliminated during the Clinton administration with the support of successive Treasury secretaries Rubin and Summers. The financial reform legislation of 2010 partly reinstated the risk-reduction that Glass-Steagall sought by limiting the proprietary trading of commercial banks (since such banks have government-insured deposits).
17
A current case involves the Tribune Company, owner of the Los Angeles Times and other media properties. After a leveraged buyout that heaped the company with more debt than it could manage, it went into bankruptcy.
18
One can properly take exception to the use of the term “conservative” in this regard, since a genuine conservatism would have been much more concerned with preservation of the environment and protection of the weakest members of society that an earlier conservatism typically embodied, a kind of noblesse oblige. This type of conservatism was replaced by the kind of populist bombast of the type to be found in talk radio and can be more properly labeled as a form of neo-conservatism, one focused on limiting government activities to the minimum rather than on the conservation of tradition.
19
1980 marks the election of President Reagan and the ascendancy of neoliberal ideology. The economic expansion, however, took root only in 1982 after a double-dip recession that covered 1980-82, when Fed Chairman Volcker raised interest rates sharply to deal with the stagflation that had prevailed from the early 1970s. In an earlier essay (Lippit 1997) I argued that the new SSA was clearly established only by 1995. My reasoning was that only in that year did the long-term stagnation in U.S. productivity come to an end. Others have argued (see, for example, McDonough, Reich, and Kotz 2010) that a more appropriate starting date is 1980, when the neoliberal era was ushered in with the Reagan administration. While there is always a certain amount of indeterminacy as far as dating SSAs is concerned (and it is especially difficult to establish the start of an SSA before it has ended), the shift in ideology and institutions that the Reagan era brought with it, together with the wage stagnation and the rising share of profits in GDP, have brought me to the view that a 1980 start date is indeed most appropriate.
20
While the typical mortgage in the United States is for thirty years, frequent home sales and refinancing reduce the average mortgage life to well under ten years.
22
The National Bureau of Economic Research business-cycle dating committee declared the recession over as of June 2009. That simply means that the economy had begun to expand as of that date, not that the expansion was vigorous or sufficient to lower the unemployment rate significantly (Wall Street Journal, 9/20/10).
23
The rise of the Tea Party and the backlash against government intervention in the economy is characteristic of the struggles economies go through when an SSA has collapsed. In this case, devotees of the old neoliberal ideology press for public policies (like immediately slashing public expenditures) that can only be counterproductive by reducing aggregate demand, contributing to prolonging the period of economic stagnation before a new SSA can be formed.
24
According to a Wall Street Journal report, U.S. firms held $1.84 trillion in cash as of June 2010, up 26 percent from a year earlier and the largest increase in records dating back to 1952. Cash as a percentage of corporate assets was at its highest level since 1962 (David I. Templeton, “Cash Balances of U.S. Firms,” bullfax.com ).
25
Sluggish growth is not meant to imply zero growth. A variety of factors are influencing the growth of the U.S. economy over the near term, some of them positive. For example, the fall in the value of the dollar over the last seven years and double-digit annual wage increases in China have helped to make U.S. exports more competitive. This, as well as the technological innovation represented by fracking (hydraulic fracturing), which has pushed down natural gas prices dramatically, are contributing to a limited revival of manufacturing. Despite such favorable developments, however, the U.S. revival since the formal end of the “Great Recession” in June 2009 has been far below the average recovery pace.
26
Workers will face higher taxes as the burden of Social Security and Medicare grows, while funding for education and child benefits will prove more difficult to provide as a rising share of government expenditures is devoted to entitlements for the elderly.
27
This is all in addition to ongoing Republican efforts to defeat the health care reform in the courts or to repeal it.
28
Sarah Palin, Republican vice presidential candidate in 2008, has made this much more difficult since calling (in 2009) the panel to control costs established by the health care bill a “death panel.” Some form of rationing that limits what medical procedures and drugs will be covered will ultimately be necessary for any form of national health insurance to be financially viable. Ms. Palin’s “death panel” charge was rated by the nonpartisan the biggest political lie of the year (Los Angeles Times, 12/23/09).
29
This problem is much greater for Europe and Japan, with both aging more rapidly than the United States and growing more slowly economically.
30
Despite opposition from organized labor, free trade bills covering South Korea, Colombia, and Panama were approved in October 2011.