A quarter-century of failed economic leadership

After the fall of the Berlin Wall in 1989 and the Soviet Union in 1991, the United States had an unprecedented opportunity to shape the future. The opportunity was simply limitless for democracy and for capitalism. Unfortunately, the course taken was too much capitalism and too little democracy. The blame for the bad judgments along the way can be ascribed to both political parties. Bad judgment by successive political leaders, starting with President George H.W. Bush, continues to the present and includes President Obama. In addition to the international consequences, bad judgment uniquely victimized the middle class of America.

{mosads}What is transpiring in this upcoming election is the slow burn of wage earners as they come to understand what happened. Those governing and their business sponsors have done exceedingly well at the expense of everyone else. Real income for the roughly 140 million working people of this country is stagnant and has been for the past 30 years. In addition to diminished buying power, business has been freed up and government has codified cost shifting for healthcare, education and financial safety nets and removed vacation days, sickness pay, maternity leave and job protection. Trade deals exported millions of jobs overseas. Relocation and retraining programs have been underfunded.

Had you been a fly on the wall in the middle years of the past century, you might have observed and understood that a rising middle class in the U.S. was uniquely responsible for the reliable and steady, above-average rate of growth in the economy. It is a simple observation that required only a sense of economic history. Despite the benefit of hindsight, it hasn’t registered and is not a part of mainstream dialogue. When talk turns to the sluggish economic recovery of the past seven years, there are those amongst us who shake their heads in wonder at how elites deliberately or blindly cannot see that a “thinning out” of the largest segment of the economy is the cause for slow growth.

The collective judgment immediately after the collapse of the Soviet Union was to open up trade and raise the economic welfare of the world using the economic strength of the developed countries to drive the train, with the U.S. as the lead engine. Free trade would allow for economies that would benefit all parties and, if accompanied by the spread of democracy, that would be OK too.

Our capitalist mindset was combined with democratic rhetoric. There were two unfortunate elements in this prescription, however. First, it made too little of the realties where corruption and authoritarian ideas mar the history and psyche of most of the world. As historian Will Durant has suggested, “Monarchy seems to be the most natural kind of government. … democracies, by contrast, have been hectic interludes.” Most of the experiments in democracy have been overwhelmed by corrupt or authoritarian leaders. In the end, it was a mistake to promote democracy because some had too little understanding of the requirements of a civil society for democracy to work.

The second failure was too little understanding of the fundamentals of economics by capitalists. What was completely lost was the stakeholder culture that drove the advances in the middle class. Loyalty to employees was gone. While policymakers may have understood, in 1990, that U.S. consumption — 30 percent of global resources by merely 5 percent of the world’s population — was untenable for a peaceful world order, it was viewed by business as a bloated wage environment that could be cured by free trade lowering costs and enhancing profits.

The new economic order was enabled through a series of trade deals. Unfortunately, these deals were all negotiated and confirmed by a legislature and president who were captives of the business elites and the corporate mindset. This “laissez-faire” mindset had successfully captured the Washington culture during the Reagan years and set the stage for the distortions committed during the Clinton administration. They continue to the present in the form of disputes over the Trans-Pacific Partnership (TPP). The Germans recognized that trade dislocations would require a system to combine the efforts of business leaders, workers, educators and government to identify new jobs, make training available and transition workers to minimize dislocations. Not so in America.

The result was reduction in consumption rates in the U.S. (we currently consume 24 percent of the world’s gross domestic product), but it was not voluntary and was not evenly distributed. The business class looked to open up the U.S. to world trade, which quickly became outsourcing production and services to less expensive labor markets. The profits garnered were accompanied by outrageous increases in executive pay. The price paid was what we now refer to as the “thinning out” of the middle class. The objectives of the business class focused narrowly on self-interest without any regard to the consequences of the damage and decline to average wage earners.

There was absolutely no concept of shared sacrifice in this transition. What we are faced with now is the reaction by the majority in this country awakening to the fact that political leaders failed all but the elites. We now see also that those elites are blind to plain and clear economic realities. If workers don’t prosper, the economy doesn’t either.

Russell is managing director of Cove Hill Advisory Services.