“Saving American Politics from the Collapse of the Two-Party System”

Peter Dale Scott: “Saving American Politics from the Present Two-Party System”

(2519 words, 3057 with footnotes)

What I want to talk about tonight is “Saving American Politics from the Present Two-Party System” as it has been working for years, and threatens to go on working. What is that system? Gore Vidal put it very memorably: there is now “only one political party, the Property Party, with two right wings, Republican and Democrat.”[1]

But I’m not here to despair of the American political process, but to express my qualified hopes for it. I want to argue tonight that the root problem in this country is increasing disparity of wealth and income – I’ll give some figures later on. In my opinion the Paulson bailout passed last year, pushed by a Republican White House and a Democratic majority in Congress, was a scandal, because it nakedly increased this disparity. It was a raid on the wealth of the res publica, the republic, to salvage the status of its wealthiest class. This was just the last and worst example of government assisted predatory corporate behavior dating back to the Savings and Loan scandals of the 1980s, or Enron’s criminal gaming of California’s energy deregulation at the turn of the century.

Some of the strongest opposition to this bailout was voiced by Republicans. I’m hoping that the Republican Party can introduce a criterion for all future bailout laws (and there will be more than one). The criterion is that any contemplated bailout should work to reduce disparity of income and wealth, not increase it. The criterion is that any contemplated bailout should work to reduce disparity of income and wealth, not increase it. This is a very simple principle, and I’m hoping people in this room will endorse it, perhaps even help launch a movement to endorse it.

In the auto industry, for example, workers will clearly have to accept cuts in remuneration, but so should management. As Kevin Phillips and others have suggested, a limit should be established by law to the maximum ratio of the highest remuneration to the lowest or average in any industry – perhaps a ratio of twenty to one.[2] I once heard that principle suggested to me by a Republican former vice-president of –of all places—the Bank of America. I’m hoping that at least some Republicans in this room can agree.

Let me say right now that much of what I have to say is inspired by Kevin Phillips’ great book, Wealth and Democracy. It is hopeful that Phillips, who began as a Republican and wrote The Emerging Republican Majority, and I, who began as a left Social Democrat in Canada, agree on the need to protect the republic from encroachments of private wealth.

Both Kevin Phillips and I invoke the example of the Founding Fathers as a corrective to our present crisis; and so, hopefully, did President Obama in his inaugural address.

What Was Wrong with the Paulson Bailout

As for the Paulson bailout of last fall, we clearly needed a bailout. What we did not need was a bailout altered in the last minute by leaders of both parties to guarantee that the bailed out companies could go on paying huge salaries, dividends and bonuses. This change to the bailout legislation was made after the first immediate crisis had passed.

We have seen Merrill Lynch's controversial decision to pay $4 billion in bonuses prematurely in December, after the firm lost $15 billion for the quarter, $27 billion for the year. (This was after officers in Citigroup and UBS declined bonuses.)

Even more reprehensible is the fact that after the bailouts, Paulson and the Treasury Department refused to provide details of the Troubled Assets Relief Program spending of hundreds of billions of dollars, while the New York Federal Reserve refused to provide information about its own bail-out (using government-backed loans) that amounts to trillions. This lack of transparency has been challenged by Fox TV in an FOIA suit against the Treasury Department, and a suit by Bloomberg News against the Fed.[3] I never thought that I would live to applaud Fox TV, but outsiders are uniting to demand a new direction in our crisis.

(Hopefully the new Obama administration may move in this direction. Just today TARP Special Inspector General Neil Barofsky has said, "Oversight of the executive compensation restrictions imposed on TARP recipients is a vital component of ensuring that tax dollars are not squandered by corporate executives seeking to profit illicitly from the Government's unprecedented and historic bailout of the financial industry.")

What Is the Crisis?

What exactly is the crisis? In my view, it is decades of first weakening and then raiding the common treasure, the res publica, for the enrichment of the rich. For three decades this unprincipled deregulation and market fundamentalism has gone on under both parties.

There is something old here, but also something new.

What is familiar, and quite old, is the dominance of both parties by the very rich financial elements of the country: Here are three quotes in my book The Road to 9/11, which I took from Kevin Phillips:

I hope we shall crush in its birth the aristocracy of our monied

corporations which dare already to challenge our government

to a trial of strength, and bid defiance to the laws of our

country.

Thomas Jefferson, 1816

We hold it a prime duty of the people to free our government

from the control of money.

Theodore Roosevelt, 1912

The real truth . . . is, as you and I know, that a financial element

in the larger centers has owned the Government ever since the

days of Andrew Jackson.

Letter from Franklin D. Roosevelt to Colonel E. M. House, 1933[4]

The election of 2001 recalled election of Rutherford Hayes in 1876, won by one vote in a special Congressional Committee. Hayes went on to inaugurate the Gilded Age of robber barons, and used the US Army to break a railroad strike by shooting and killing 70 striking railwaymen.

Bush in 2001 also won by one vote – in this case it was the black vote – Clarence Thomas. His presidency became the climax of a new Gilded Age. In my book I show that this Gilded Age began in 1975, when Donald Rumsfeld and Dick Cheney made some crucial changes from their position in Gerald Ford’s White House. I will oversimplify in a phrase: faced with tough decisions after the failure of the Vietnam War Rumsfeld and Cheney prepared for Rockefeller Republicanism (a regulated economy in cooperation with trade unions) to be replaced by Reagan Republicanism (a free market economy crushing trade unions).

Listen to Prof. Edward Wolff (2003):

We have had a fairly sharp increase in wealth inequality dating back to 1975 or 1976. Prior to that, there was a protracted period when wealth inequality fell in this country, going back almost to 1929. So you have this fairly continuous downward trend from 1929, which of course was the peak of the stock market before it crashed, until just about the mid-1970s. Since then, things have really turned around, and the level of wealth inequality today is almost double what it was in the mid-1970s….

Let me interject that when I first came to Berkeley in 1960s I would always say that I was not a Marxist, because in America you did not have the sharply delineated classes that Marx saw in Europe a century earlier, and there was no class war. But times are changing. Prof. Wolff again:

Up until the early 1970s, the U.S. actually had lower wealth inequality than Great Britain, and even than a country like Sweden. But things have really turned around over the last 25 or 30 years. In fact, a lot of countries have experienced lessening wealth inequality over time. The U.S. is atypical in that inequality has risen so sharply over the last 25 or 30 years.[5]

Past excesses of American wealth, as in the Gilded Age and the 1920s, have been followed by political reforms, such as the income tax, to reduce wealth and income disparity. The Gilded Age was followed by Theodore Roosevelt and the Progressive Era. The Wall Street bubble of the 1920s (so much like what we have just seen) was followed by Franklin Rooevelt and the New Deal. This zig and zag of incipient plutocracy, followed by reform, has been a fundamental rhythm of American politics since Andrew Jackson.

The question is whether we can see it again. As Kevin Phillips has warned, this type of reform must happen again soon, or it may not happen at all:

As the twenty-first century gets underway, the imbalance of wealth and democracy in the United States is unsustainable. . . . Either democracy must be renewed, with politics brought back to life, or wealth is likely to cement a new and less democratic regime—plutocracy by some other name.[6]

This warning by Phillips was published in 2002. Despite all the talk of change in the last election, I do not see that any electoral challenge has yet appeared to this imbalance of wealth and democracy. I’m hoping that there are a few good Kevin Phillips Republicans in this room to make it happen. That is my message to you tonight, and if I was smart I might just stop there. But I want to add a little more sense of urgency to my remarks, and offer my personal prescription for an urgent change.

Just how pathological the disparity of wealth and income has become in America is revealed in a research paper by Ian Dew-Becker and Robert Gordon of Northwestern University:

Between 1972 and 2001, the wage and salary income of Americans at the 90th percentile of the income distribution rose only 34 percent, or about 1 percent

per year. . . . But income at the 99th percentile rose 87 percent; income at

the 99.9th percentile rose 181 percent; and income at the 99.99th percentile

rose 497 percent.”[7]

Many of these increases are marked by the transfer rather than the creation of wealth and derive from what Phillips has called the “financialization” of America: the “process whereby financial services, broadly construed, take over the dominant economic, cultural,

and political role in a national economy.” [8]

But I am not attacking one class in particular, but an entire culture that has encouraged the glorification of greed. As a former academic, I am upset at the role played by the best universities and business schools. Gordon Gekko’s famous slogan in a movie, “Greed is good”, is based on Ivan Boesky’s words at the University of California Haas Business School, “Greed is healthy.” for which Boesky was cheered.

Then there is the problem of the mainstream media. I hope you know about New York Governor Eliot Spitzer’s Washington Post Op-Ed last February. Spitzer

wrote that several years earlier, state attorneys general noticed a spike in predatory lending that the federal government was doing nothing about. When the states tried to rein in abusive mortgage lenders, the Bush administration finally did something. The Office of the Comptroller of the Currency issued rules nullifying state predatory lending laws over the objection of all 50 state banking superintendents.

The clampdown, which paved the way for the subprime mortgage crisis, was done by “pre-emption,” a little-understood doctrine that allows the federal government to wipe away state laws.[9]

Spitzer’s Op-Ed went up on the Washington Post website on February 13. If it had an impact, it was not the one Spitzer had hoped for. On March 10 the New York Times broke the story of Spitzer’s encounter with a prostitute, and Spitzer became a front page story. According to a later Times story, it was on Feb. 13 that federal agents staked out his hotel in Washington.”[10]

It is remarkable that the Mainstream Media found Spitzer’s private life to be big news, but not his charges that Paulson’s Treasury was prolonging the financial crisis, or the relation of these charges to Spitzer’s exposure.

What We Can Learn from Abroad about Our Present Crisis

Both the universities and the mainstream media have celebrated the ideology of free market fundamentalism, or laissez-faire. This was the doctrine forced on Russia in the 1990s, until Russia went bankrupt. Both the average standard of living and life expectancy declined rapidly in this period. Meanwhile the number of billionaires increased, until in 2004 Russia boasted the greater number than any other nation.[11]

In America’s neighbor Mexico, the income share of the middle class and poor has been declining since NAFTA was introduced. The poorest 50 percent received 20.7 percent of national income in 1984, and 16 percent in 1996.[12] The middle class also declined, from about 60 percent of the population in the 1970s, to 35 percent in 1995.[13]

Meanwhile the country in 1994 with the fourth-largest number of Forbes billionaires “was Mexico, with twenty-four. Their declared fortunes combined would represent nearly ten percent of Mexico’s annual gross national product.”[14] United Nations and World Bank studies have confirmed that, outside of Africa, “Mexico has the largest gap between rich and poor of all but six nations in the world.”[15] (As Jorge Castañeda has commented, “If democracy does not coincide with growth and with redistribution, in all likelihood it will not last in Latin America.”)[16]

There is of course no way to keep this state of affairs confined within Mexico. Inevitably Mexico’s dispossessed will continue to seek relief, by immigrating illegally to the United States.

In the case of Mexico, there is an increasing agreement that the ideas of market fundamentalism, far from solving Mexico’s problems, aggravated them.[17] Amy Chua, who once worked for a U.S. bank on a Mexican privatization project, is part of this new consensus. In her book she blamed the increase of poverty in the 1990s on this American promotion of what she called “laissez-faire capitalism – a form of markets that the West abandoned long ago.”[18] She criticized the U.S. and IMF campaign for freeing markets from government regulation, as a campaign that “rarely includes any significant redistributive mechanisms..”[19]

In Mexico twelve billionaires, the so-called “Mexican twelve,” were enriched by Salinas’ program (which was actually a product of the so-called Washington consensus) of “`directed’ deregulation or selective liberalization.”[20] The lack of controls over capital movements, another feature of the liberalization pushed by the Washington consensus, was a major factor in the impoverishment of the majority. In the case of Mexico, there was massive withdrawal of foreign and domestic capital in December 1994, leading to “an estimated $70 billion loss in the stock-market value of Mexican corporations, an avalanche of bankruptcies, and nearly a million layoffs over the next twelve months.” Government figures confirmed that in the next fifteen months the number of people living in extreme poverty increased by five million to 22 million.[21]

As a former diplomat with experience at the UN, I personally believe that in due time we will see that movements of international capital need to be regulated internationally, even if this prevents American billionaires like George Soros from speculating against other nations’ currencies. (Soros by the way agrees with this proposal.)

But I have not come here as an academic to promote my own economic theories. Rather I am hoping to encourage a movement aimed at reducing income wealth and disparity in this country, by applying this criterion to future bailout legislation. And I’m hoping that there are a few good Kevin Phillips Republicans in this room to make it happen.

[1] Gore Vidal, United States: Essays 1952-1992 (Abacus, 1994); in Peter Dale Scott, The Road to 9/11: Wealth, Empire, and the Future of America (Berkeley: University of California Press, 2007), 255.

[2] Robert Frank notes the popular proposal to cap the chief executive’s pay at each company at 20 times its average worker’s salary; and suggests that it would be appropriate for Congress to cap executive pay in financial institutions receiving bailout money (New York Times, January 3, 2009).

[3] David Hirst, “Fox joins battle cry for details of US bail-out,” BusinessDay, December 24, 2008, http://www.businessday.com.au/business/fox-joins-battle-cry-for-details-of-us-bailout-20081223-74eh.html?page=-1.

[4] Scott, The Road to 9/11, 1.

[5] Edward Wolff, “The Wealth Divide: The Growing Gap in the United States Between the Rich and the Rest,” Multinational Monitor, May 2003, http://www.thirdworldtraveler.com/America/Wealth_Divide.html. Cf. Edward Wolff, Top Heavy: The Increasing Inequality of Wealth in America and What Can Be Done About It (New York: New Press, 2002).

[6] Kevin Phillips, Wealth and Democracy: A Political History of the American Rich (New York: Broadway Books, 2002), 422; quoted in Scott, The Road to 9/11, 3.

[7] Quoted in Scott, The Road to 9/11, 3.

[8] Quoted in Scott, The Road to 9/11, 3.

[9] Adam Cohen, New York Times, May 23, 2008.

[10] David Johnston and Philip Shenon, “U.S. Defends Tough Tactics on Spitzer,” New York Times, March 21, 2008.

[11] Sunday Business Post, May 16, 2004, http://archives.tcm.ie/businesspost/2004/05/16/story593333026.asp

[12] Castañeda, The Mexican Shock, 215; New York Times, July 20, 1996. The ensuing part of my talk forms part of my essay on Mexico in Government of the Shadows: Parapolitics and Criminal Sovereignty, ed. Eric Wilson and Tim Lindsey (London: Pluto Press, forthcoming).

[13] Clyde Prestowitz, Rogue Nation: American Unilateralism and the Failure of Good Intentions (New York: Basic Books, 2003), 78.

[14] Castañeda, The Mexican Shock, 37.

[15] Anthony DePalma, "Gap Between Mexico's Rich and Poor Is Widening," New York Times, July 20, 1996: “Today the richest 10 percent of Mexicans control 41 percent of the country's wealth, while the bottom half of the population receives only 16 percent of all national income. The government admits that the number of Mexicans living in extreme poverty has grown to 22 million, an increase over just the last 15 months of 5 million people, roughly equal to the population of Scotland.”

[16] Castañeda, The Mexican Shock, 239.

[17] See for example Pedro-Pablo Kuczynski and John Williamson, After the Washington Consensus: Restoring Growth and Reform in Latin America (Washington: Institute for International Economics, 2003).

John Williamson originally coined the phrase “Washington consensus” in 1990.

[18] Amy Chua, World on Fire: How Exporting Free Market Democracy Breeds Ethnic Hatred and Global Instability (New York: Doubleday, 2003), 14.

[19] Chua, World on Fire, 195.

[20] Oppenheimer, Bordering on Chaos, 90-93: “Mexico in the early nineties was similar to American capitalism in the late 1870s….Like the American `Robber Barons’ of their time, the Mexico Twelve were making a fortune from their close partnership with the government.” What Oppenheimer writes of the Mexico Twelve in Mexico could be said also of Halliburton and Enron in Washington.

[21] New York Times, July 20, 1996