Liberal Capitalism’s Last Stand

The Last Stand of Liberal Capitalism has arrived.  The Republican tactics make clear that Liberal Capitalism (LC), with its alliance of the symbiotic interests of the rich and the workers, is dead; in its place, in all its Robber Baron nakedness, they want to move to Brutal Capitalism (BC).

What is Brutal Capitalism?  BC synthesizes its antithetical predecessors, Marxism-Leninism and LC.  From Leninist post-totalitarian states, it takes a military-police security state mentality; from LC, it takes the relentless pursuit of profit.  BC destroys LC in just the way the Republicans propose: keep taxes low on the rich; eradicate government social programs like Medicare, Social Security, and Medicaid.  In Brutal Capitalism, the jobless economic recovery is not an aberration, but an integral part of the system.

Liberal Capitalism and Marxism-Leninism underwent crises in the late 1970s.  In 1981, reeling from deadly blows to two of the core elements of their post-totalitarian order – fear and bogus unions – the Soviets violated one of the core principles of Marxism-Leninism:  they handed dictatorial power to a military man, Gen. Wojciech Jaruzelski, in their largest client state, Poland.  The long-term consequences became obvious only in November 1989, but by then the predictable demise was well underway.

The Jarulzelski Moment of the “Liberal” element of Liberal Capitalism came when Ronald Reagan changed the tax laws.  From the 1920s to 1980, the Gini index of inequality in the US declined, in large measure due to high marginal tax rates on high-end earned income and on long-term capital gains. Reagan drastically cut the former (from 70% to 28%) and the latter (40% to 20%).   The governmental debacle created by the Reagan-Bush deficits (the Federal debt went up 400% in their 12 years) led to restoration of saner tax levels (38.6% top rate on income, 28% on long-term capital gains), which in turn helped restore sound government finance. Today, the top marginal income tax rate is 35%, the lowest level since 1931 (aside from 1988-92), and the capital gains tax is a mere 15%, its lowest level since 1933.  As for corporations, their income taxes have dropped from about 5 to 6% of GDP after World War II to 2% of GDP today.

Republicans insist the maintenance of those rates is non-negotiable, yet our two greatest economic disasters – the Great Depression and the Great Recession of 2007 – took place at virtually identical tax rates.  The correlation is not coincidental: those tax rates leave the government with far too little revenue to intervene effectively in the economy.  Economic interventions by both Bush and Obama have required massive borrowing to help restore sectors of the economy because the government takes in far too little tax revenue.  Low tax rates combined with economic downturn mean financial catastrophe for the government, whether it’s 2008 or the late 1980s or 1930.

Not surprisingly, since 1980, the share of national capital of the wealthiest Americans has risen sharply.  The CIA estimated our Gini index as 45 in 2007; that’s the same level as 1929.  Unemployment has doubled since 2007, and the stock market gone up 80%, so the Gini index today is probably closer to 48, the same as that of the classic Brutal Capitalist state, Singapore.  China and Russia, who have come to Brutal Capitalism by way of Marxism-Leninism, are rapidly moving into the mid 40s, too.  (Europe and Canada are mainly in the low 30s.)

In 1989, John Williamson coined the phrase “Washington Consensus” to describe LC’s ten core principles, which include “fiscal discipline” and heavy government investment in education and research.  The World Bank and the IMF have imposed these principles on “developing” states, just as they are doing now in Greece or Ireland.  What about the US or the European Union (EU): don’t they have to adhere to fiscal discipline?  Consider that EU official targets to enforce fiscal discipline are budget deficits no higher than 3% of GDP and publicly held debt not in excess of 60% of GDP.  How many EU countries met that deficit target in 2010?  None. Only Germany came close, at 3.3%.  France came in at about 7%, Spain at 9%. Naughty old Greece was 10.5%, oh, why that’s the same level as the UK and the US.   How about public debt?  In the Euro zone as a whole, it’s 85% of GDP.  The US, which was only 33% when George W. Bush took office, has nearly doubled in four years (to 69%); the CBO says we will hit 75% by 2015.

The low tax rates of Reagan-Bush show where lack of “fiscal discipline,” as measured by those two yardsticks, leads: starting with Reagan’s first budget (1982 fiscal year) and ending with Clinton’s first one (1994 fiscal year), Federal debt as a share of GDP rose from 28.7% to 49.4%. In contrast, under the fiscally responsible Clinton, Federal debt as a share of GDP dropped to 33% of GDP (fiscal year 2001).  Reagan and Bush met the 3% of GDP deficit target only once in 12 years; their median deficit was 4.25% of GDP.  In contrast, the Federal government met that target 12 of the 14 years from 1968 through 1981 and all eight years of Clinton’s presidency: the median of the period 1968-81 was less than half of the Reagan-Bush percentage, and Clinton’s median was a SURPLUS of 0.25% of GDP.  (Figures:

Brutal Capitalism does not care about fiscal discipline; it merely uses that phrase as an excuse to gut the social programs that enabled France or the US to change dramatically their economic inequality between 1950 and 1980.  It slashes budgets for education and research: in the UK, Cameron’s government cut teaching budgets by 80% (100% in arts, humanities, and social sciences), and reduced funding for scientific research.

Because Brutal Capitalism wants education merely to train worker drones, it detests educational institutions that spread critical thinking skills among too broad a section of the populace.  LC, drawing on principles it took from democratic republicanism, believed that education formed citizens, not just skilled workers.  BC, as we see in the UK today, where universities have spent over a decade under the Ministry of Business, Innovation, and Skills, wants to stamp out such education at all but a handful of elite schools.  BC’s militarized security state demand obedience, not critical citizenship skills, from all but the elite; its economy demands rote skills in the cubicle, today’s factory floor.

The financial bailout of 2008 was probably Liberal Capitalism’s Jaruzelski Moment.  Only by restoring tax and political policies that move us back into Gini territory shared with places like Canada and Western Europe, both as a matter of sound economic policy and for political stability, can LC revive.  If the Republicans get continuation of the current tax structure, BC’s triumph will be swift and ugly, its society “nasty and brutish.”

Judging the results of this week’s game?  You can’t tell the players without a scorecard, so here it is:

Player 1) Social Security.  Restore fiscal discipline by returning to the 1981 level of total wages subject to SS withholding (91%; today, it’s 85% ).   The CBO explained why in testimony to Congress last year.

Player 2)  Fiscally responsible tax rates.  Set capital gains at 25% (as in the boom 1960s); a marginal rate of 30% on the top 5% of total income and of 40% on the top 1% of total income.

Player 3)  Corporate responsibility.  Corporate income taxes should return to a fairer share of GDP, say the 5% of the 1950s (as against today’s 2%).

Player 4)  Spending discipline.  Return Federal government spending to the responsible, median level of the 1970s through the 1990s, 21% of GDP (it’s currently 25%).  The discussion of 18% of GDP is ludicrous:  only three times since 1975 (1999-2001) has Federal government spending dipped below 18% of GDP, and that was due to the massive increase in GDP in the 1990s (up 60% between 1993-2002).

Player 5)  Reform of entitlement programs and the health care system.  Reforming Medicare and Medicaid without reforming the health care system is pointless.  No country can afford to spend 16% of GDP on medical care; by 2035, if current trends continue, the CBO estimates that 31% (!) of our GDP will be spent on health care, the lion’s share of it on those over 60.  Societies need to focus expenditure on the young, not the old. By 2020, the CBO estimates that 24% of Federal spending will go to health care; Medicaid alone already accounts for about one-fifth of state governments’ spending.  Expenditures at such levels cannot be sustained.

Will those players come to bat this week?  Don’t hold your breath for the first four in the order; player 5 will surely strike out.  Systems that abandon their core values do not come back to life.  Five years from now, the party in power will have no choice but to inflate the government out of debt: the coming inflation of 2015-2019 will devastate the savings of the Baby Boomer generation at precisely the moment that Brutal Capitalism eviscerates the social programs that protected their parents from penury.  Then the Republicans will learn again the lesson of the 1930s that ruthless economic exploitation is not just bad business, it is bad politics.


Addendum:  several people have asked for a broader explanation of the term “Jaruzelski Moment”: I hope to post that one soon, along with some comments about the Greek debt fiasco.

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