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Can Democracy Survive Global Capitalism? Hardcover – April 10, 2018
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“Democracies govern nations, while global capitalism runs the world. Robert Kuttner provides a clear-eyed, intellectually riveting account of how the inevitable tensions between the two have fueled neofascist nationalism here and abroad, and why the response must be a new progressive populism rooted in democracy and social justice. Timely and compelling.”
- Robert B. Reich, chancellor’s professor of public policy, University of California at Berkeley
“Robert Kuttner combines economic acumen, a gift for narrative, and genuine passion in his persuasive new book. In his telling, the issue isn’t whether national economies should be open to foreign trade or finance. It’s whether the rules of the global economy are set up to benefit?ordinary citizens or merely economic elites.”
- Jacob S. Hacker, Yale University and coauthor of Winner-Take-All Politics
“Kuttner brilliantly brings together two strands of thought: explaining both the economics and politics of global capitalism and how our society has abandoned core principles of fairness and equality. The rise of inequality helped pave the way for Donald Trump―a figure out of step with basic American values. Kuttner reminds us of the urgency with which we need to get back to a more just society.”
- Joseph E. Stiglitz, Columbia University, winner of the Nobel Prize in Economics and best-selling author of The Price of Inequality
“Standing on the shoulders of Karl Polanyi, Bob Kuttner revives the lost art of political economy in this absorbing and important analysis of wild markets, assaults on labor, and profound changes to institutional rules.”
- Ira Katznelson, Columbia University and author of the Bancroft Prize–winning Fear Itself: The New Deal and the Origins of Our Time
“Democracy is no longer writing the rules for capitalism; instead it is the other way around. With his deep insight and wide learning, Kuttner is among our best guides for understanding how we reached this point and what’s at stake if we stay on our current path.”
- Heather McGhee, president of Demos
“Conventional wisdom has it that our income disparities and dysfunctional politics are the consequence of inexorable and uncontrollable developments in technology, market competition, and globalization. As Robert Kuttner argues in this superb book, they are instead the result of our own policy choices.”
- Dani Rodrik, Harvard University and author of Straight Talk on Trade and The Globalization Paradox
About the Author
Robert Kuttner, cofounder and coeditor of The American Prospect, is a former columnist for Business Week, the Washington Post, and the Boston Globe. He holds the Ida and Meyer Kirstein Chair at Brandeis University, and lives in Boston.
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Ultra-nationalists who reject both the EU and the doctrine of liberal trade are now the 2nd or 3rd largest party in much of Europe. Democracy is under siege. This reaction is compounded by resentment of immigrants and refugees, as well as resurgent racism. Nothing in the structure of the late-20th-century economy compelled reversion to an unregulated 19th-century market. This was a political shift. When American government turned back into an ally of finance in the 1970s and continued emphatically into the 1980s, goals for the global system reversed. Today's version of globalization is profoundly antidemocratic. Global trade agreements narrow the space for national policy and weaken government's ability to contain capitalism. Meanwhile, the popular revulsion against the results of globalization is elevating antidemocratic leaders, parties and ultranationalionist sentiments. The rise in terrorism and fear of aliens also promotes support for anti-foreign strongmen.
Post-WWII, banks could not do business outside the borders of their home countries. There was no speculation in currencies because exchange rates were fixed. Categories of financial products that operate globally today add to system ungovernability and instability - eg. credit default swaps that did not exist then. Originally interest rates could be kept low, providing cheap capital without worry that easy money would fuel speculation and bubbles. This also constrained the wealth and power of financial elites. Since then elites have won the policy debates but lost the citizenry.
Globalization also accelerates cross-border movements of people/cheap labor. Remittances have become an important source of income for much of the third world. Meanwhile, government and politics in the democracies are hobbled by paralysis in the face of escalating problems. In the U.S., three decades of cynical Republican and corporate blockage of economic remedies discredited government and politics, paving the way for Trump.
In the history of the West, democracy has expanded by limiting the power of capitalists. When that fails, dark forces are often unleashed. Recently Democrats have been forced to rely more on raising money than group activity - eg. via the rise of advertising, opposition research, computer analyses. This has pushed that party to the right, while at the same time Republicans have also moved further to the right. Both seek big donations from Wall Street.
American corporations are now making record profits, yet workers' wages have stagnated over the last few decades as productivity increased. Global capitalism has allowed U.S. corporations to step around decades of protections (minimum wage, child labor, labor unions, health and safety regulations, local taxes, etc. restrictions). However, deregulated capitalism returned the upper hand to the elites - and they began dominating politics again. Many contend that today's problems are caused by immigration and technological change. Kutter contends that 'Democracy no longer writes the rules for capitalism - instead it is the other way around.
During the period between the two world wars, free-market liberals in France, Britain, and the U.S. They put debt collection ahead of economic recovery. Up until the German election of July 1932 that made Nazis the largest party, the governing coalition was practicing economic austerity commended by Germany's creditors. tried to restore the pre-WWI laissez-faire system.
The New Deal shackled private finance in a manner that has not been equaled before or since. The 1933 Glass-Steagall Act removed an entire category of speculation and conflict of interest by requiring stock brokerages and investment-banking houses to be divorced from commercial banking. Interest rates charge borrowers and paid depositors were also tightly regulated - to discourage forms of competition that could damage solvency. Nationwide banking was prohibited and branch banking limited. It was the behemoth banking conglomerates, liberated from New Deal restraints, that engaged in complex speculation and excess leverage to reap immense speculative profits - then crashing in 2007-8. Credit evaluation was not delegated to third parties, instead performed directly by loan officers. There were no significant bank failures after 1934.
In the U.S. and Britain, the rate of inflation tended to exceed the interest rate on public debt for three decades after WWII. Thus, the average burden of public debt declined over time.
The economic slowdown of the 1970s brought the resurgence of business influence, laissez-faire ideology, and right-wing politicians to dismantle much of New Deal financial regulation.
Trade unions prevalent in Europe after the war were often recognized as partners, and also understood the need for not pricing themselves out of the market. Key contracts were set at national levels - factory-level settlements that were more generous were frowned upon as destabilizing.
The share of U.S. income going to the top 1% fell from 36% of total income in the 1920s to about 24% in the 1950s, to less than 15% in several European nations while unemployment was less than 2% for two decades.
In the 1970s a laissez-faire financial system and global disorder returned after 1973, unemployment rose and wages came under pressure. Women entering the labor force in large #s continued the growth of more equal household income for a few more years. Then, as capital was deregulated, incomes took off again at the top, supply-side theories gained ground and taxes were cut - especially for the well-off.
The Iron Law of Capitalism - return on invested capital tends to exceed the rate of economic growth, and wealth thereby becomes more concentrated over time.
As Europe recovered after WWII and U.S. dollars flowed outward in the form of military aid and tourism, the U.S. current account balances became negative by about $1 billion/year in the early 1950s and $3 billion/year by the late 1950s. Offshore dollars could then be loaned out to finance European growth, with less regulation. By 1960, dollars held offshore exceeded the value of gold held in Ft. Know by $19 billion. By 1968, Vietnam War spending overseas added to the problem, creating a run on the dollar, a 10% tax on imports, wage/price controls, and the price of gold was left to the markets. Fixed exchange rates ended, along with currency controls and tight financial regulation. Rising imports were acerbated by the Arab oil embargo - quadrupling the price of oil. Now governments needed to run their economies less in service of steady growth and full employment, and more to keep the trust of financial speculators wanting high interest rates, less taxes on capital, balanced budgets, limited social outlays. The U.S., however, went into deficit spending and every growing trade deficits.
While Kuttner doesn’t cover the first one in much detail, there have been three periods of aggressive financial deregulation in the industrial era. And each was ultimately empowered, indirectly, by the need to finance war debt. The first was the war debt of the Civil War, which was ultimately financed by crushing debtors and rewarding creditors, an asymmetric victory that gave rise to both the gilded age and the cooperative movement, ultimately called the populist movement, of the late 19th Century. The second occurred between the world wars and ultimately gave rise to the Fascists, Hitler and Mussolini.
The third was different and followed World War II. It was different because the US and European powers, for reasons Kuttner explains in detail, decided to regulate their financial markets. What followed was a period of unprecedented economic growth and income equality.
There are two primary constituents of all modern economic activity. One is labor, which I broadly define to include everyone who actually contributes directly to the manufacture of products or the provision of services. The second are the capitalists themselves—the bankers, investors, and speculators that trade in the capital that every business needs to operate and expand.
Kuttner’s ultimate message, I believe, is that the interests of these two groups is in natural conflict. But when their interests are balanced, as they were following World War II, growth and prosperity is optimized. When one or the other group is favored, growth is compromised, inequality is accelerated, and ultimately, heated divisions boil to the surface. Left unaddressed, totalitarianism steps in to fill the void.
We are currently in a period of unfettered capitalism in which banks, investors, and speculators are both operating with no oversight and no regulatory controls and reaping an increasing percent of economic growth and wealth. For the US it is a process that began in the 1970s (For Kuttner, 1973 was the watershed year.) and has accelerated ever since.
Aggravating the excesses, the CEO suites of our corporations today (I once counted myself among them.) are no longer occupied by businesspeople. They are occupied by capitalists, who through their actions, value their shareholders far more than their employees and the communities in which they operate. That, of course, is what we incentivize them to do, but it is the reality nonetheless. And it is a big change from the corporate world I entered in the 1970s.
Kuttner correctly points out that technology is not the culprit. I believe, however, that technology has empowered the excesses of laissez-faire capitalism for a couple of reasons. The first is a by-product of technology that is often over-looked: Among the great powers of technology is its ability to dumb itself down. In my four decades in international business I was involved with building overseas plants from the 1970s on. Early in that period, while it is always dangerous to generalize, it often took decades to bring a greenfield plant up to the efficiency levels of established plants in the US. One plant I was involved with in Mexico in the 80s never actually got there in my time with the company. Another plant I helped to open in China in the 00s, on the other hand, got there in just a few years. And the difference had nothing to do with the laborers themselves. The difference was the technology of production. (Obviously differences in the complexity of the production process plays a role, but the two plants I reference were very comparable on that front.)
The second impact of technology has to do with its impact on overall health and longevity. People are living longer, by a lot. And that’s a very good thing, indeed, but we have not adapted our social and economic expectations (when to retire, on the one hand, and business’ infatuation with youth, on the other) to that new reality.
The point is not to reject technology. That is not a practical choice anyway. Technology will flourish whether we want it to or not. (And we should want it to.) The only choice we have is whether to manage it or not and, to date, the libertarians of Silicon Valley and their allies in the venture capital world have convinced us not to.
In the end, capitalism comes in a variety of shades and flavors. At the moment it would be hard to find a way to favor the bankers, investors, and speculators any more than we are, both here in the US and in Europe. And we’re paying the price in terms of extreme exclusion, income inequality, stagnant economic growth, and social injustice.
And, of course, those developments have put democracy itself at risk. As Kuttner points out, Donald Trump is a byproduct of the factors that put democracy at risk, not the spark. And removing him will change nothing if we don’t, at the same time, put the bridle back on our capitalism. Government regulators are not the enemy if, and it’s a big if, we put the right people in that role.
Contrary to myth, the US has never been a free market economy when it comes to capital. Jefferson himself warned us about the tyranny of the corporation unhinged from society and the real economy. The bankers, however, won on three occasions: the first led to the market crash of 1929, the second led to the Great Depression, and we are living in the third. In each case, the rich did fine; they got richer. It is we, the rest of us, who suffered.
Kuttner sums it up best: “Democracy is more fragile than we would like it to be. It is particularly vulnerable when the economy deserts the common people.” He cautions, moreover, that liberalism is not, by itself, enough. “…liberalism and democracy do not necessarily go together. It is possible to be nondemocratic, but relatively liberal in accepting core values of the rule of law and respect for the individual.” Meaning, of course, we should evaluate other nations not by the extent to which their political system mirrors our own, which our foreign policy makers often do, but on the democratic outcome achieved.
The problem is not political party affiliation. The challenge facing every form of government is its ability to accommodate and integrate large minorities of marginalized people, either economically or politically. Both political parties in the US have failed different groups of marginalized people, but they have failed nonetheless.
In different senses, both the Republicans and the Democrats are right and wrong. “This will require much stronger democratic institutions and a radical transformation of capitalism into a far more social economy.” We don’t just need to “drain the swamp” in Washington. We need to fundamentally transform the status quo on Wall Street and in Silicon Valley, too.
In the end, Kuttner is guardedly optimistic: “This is no basis for complacency, but reason to resist despair.”
I can’t recommend this book strongly enough. Thank you, Mr. Kuttner.