Jeff Madrick is a journalist, economic policy consultant and analyst. He is also the editor of Challenge magazine, which seeks to give alternative views on economics issues, as well as a visiting professor of humanities at The Cooper Union, director of policy research at the Schwartz Center for Economic Policy Analysis, The New School, a senior fellow at the Roosevelt Institute and the author of numerous books. His latest book, The Age of Greed, is available from Amazon.
Interview conducted by Philip Pilkington, a journalist and writer based in Dublin, Ireland.
Philip Pilkington: Your book The Age of Greed is a detailed historical survey of some of the key figures that facilitated — broadly speaking — the transition away from the progressive, government-regulated economy of the post-war years and toward the finance-driven, deregulated economy in which we now live. In this interview I don’t want to focus on all the figures that crop up in the book as that is done so there in great detail. Instead I want to explore the broad sweep of this history focusing both on some of the more recognisable of these figures and on the actual cultural, political and economic shift that took place over this period.
So, let’s begin.
Your story really begins in the early 1970s. In those years there were a number of figures — most of them somewhat obscure — who held beliefs or ideologies that, while quite idiosyncratic at the time, have come to dominate the debate today. These are, to boil them down somewhat, ideologies that eschew government involvement in capitalist economies and emphasise the role of the individual in society rather than the role of the society in the individual. In the book you say that these ideologies were long dormant in the US. How far back would you trace them in the form we know them today? Where were they hiding? And why did they begin to stir in the early 1970s?
Jeff Madrick: America has long been a more individualistic nation than most European nations, or even the other North American nations, Canada and Mexico. This has become a dangerous cliché among historians, but I think it is largely true. The reason I say it is dangerous is that the role of community and government in America has been generally underestimated. As I wrote in an earlier book, ‘The Case for Big Government’, community and government investment in education, infrastructure, sanitation and so on were immense. Beyond that, there were long-standing regulations in America that enabled it to grow more equitably – notably, regulations on sales of land that made it more accessible to poorer Americans.
Nevertheless, the availability of land and resources enabled many Americans to make it on their own. They believed they did it without government, especially when looking back nostalgically. They also interpreted their 18th century break from Britain ever after as a renunciation of powerful central government.
Thus, in important ways, the return to individualistic, anti-government attitudes did have profound antecedents in the national character. Progressivism got its start in the late 1800s in the US, but the strong individualistic bent suppressed social policies, nevertheless. European nations adopted Social Security systems, for example, but the US did not. These individualistic characteristics had been partly set aside by the ravages of the Depression, but not completely. America refused to adopt a nationalized health insurance program, for example.
It is often forgotten that the social policies of the Johnson era were also hard to win. The war on poverty and the civil rights movement were not moments of bipartisan agreement. In this regard, I don’t know where President Obama gets his sense of history, or how thing were done in America.
The turn against progressivism in the 1970s was mostly the result of economic crisis. But it was an easier battle to win ideologically – or that is, for people like me, to lose – than realized because of America’s past. It was mostly economically driven, if not entirely. Many disliked the Johnson Great Society, for example. They also became increasingly skeptical of Washington with the Vietnam War and Watergate.
But the rise of inflation and unemployment in the mid-1970s so severely set back the American economy and frightened people that they needed new explanations – and scapegoats. Not only did inflation soar while the economy generated inadequate jobs, but the trade and budget deficit also rose and people saw an invasion by Japanese, German and other products in their everyday lives.
It is not an exaggeration to say that America panicked. They gravitated towards the simple views of men like Milton Friedman, who blamed government for their discomfort and insecurities. Businessmen were quick to join them, beating down government intervention wherever they could. And older line progressives fought back weakly.
In 1973, Ronald Reagan, as government of California, tried to have an amendment to the state constitution adopted that would permanently cut the state income tax. Voters defeated it soundly. Some thought Reagan’s political career was over. In the next five years, economic panic took hold and Friedman’s simple, anti-government ideas became compelling as explanations.
By 1978, Californians now voted overwhelmingly for Proposition 13, which cut property taxes sharply. A successful nationwide tax revolt got underway. Progressive only five years earlier, and still believing in social programs, the nation’s attitudes changed. This change was not yet the work of right-wing think tanks and moneyed lobbyists; they were just starting to organize. It was the attitude of the people that changed and set the change for a regression in social policies and deregulation of finance and other industries.
PP: You mention Milton Friedman. It would be hard to understate his importance. The impression I got from your book is that this anti-government movement was largely fragmented and dispersed before Friedman came along. It was him that lent serious intellectual weight to the movement and gave it the sort of policy prescriptions and theoretical sanction that it needed to rally its troops.
Yet, I cannot get over the impression that Friedman was not so much rejuvenating economic theory with new ideas as much as he was reinventing something that had been discredited decades before hand — or, at least, so many thought. Could you talk a little bit about this?
JM: There were other intellectual forces out there, not least of them Ayn Rand. And there was always a strong conservative undercurrent. William Buckley was one of its leaders. Von Hayek’s 1944 book, The Road to Serfdom, was influential. It was a best seller.
But Friedman’s work was eventually thought of as very serious and congealed the movement. Its basic assumptions were hardly original at all. You are right. He basically resurrected the old classical and neo-classical lines of thought about market economies and then profoundly over-simplified them. His very accessible and even compelling book, Capitalism and Freedom, was influential partly because it was so understandable. He seemed to provide an answer. It basically said competition and freely set prices will cure most social ills to the extent they can be cured at all. Government will almost always make matters worse.
But there was nothing in Friedman that wasn’t already fundamentally in Adam Smith. He did update those notions and attached somewhat far-fetched ideas to them about the value and power of the money supply, which in truth cannot even be controlled. The nation’s obsessive focus on inflation was also his doing. Many, including Democratic economists, thought he proved his point. I think he did not, and that theories like the natural rate of unemployment, the foundation of the inflation obsession, will be dismissed fully in time. But he gave the movement intellectual credibility and he was wonderfully articulate, to boot. In truth, his intellectual contributions will not live, however.
PP: That certainly raises a lot of questions about our present moment. It seems that many economists — at least those in the media and in the public eye — have become entrenched in their positions rather than responding to circumstances which have clearly changed. But we’ll discuss this later in the interview.
For the moment, let’s shift back to the politics of the era in question. The presidency of Jimmy Carter represents for many post-war liberalism in its death throes. Underneath the shift in economic policies — Carter, for example, led the charge on deregulation and had misgivings about running budget deficits for social programs — there was a deeper moral or even existential crisis of establishment liberalism. This crisis was clearly manifest in Carter’s famous ‘malaise speech’. That speech was famously criticised by the cultural historian Christopher Lasch — whose work was supposed to have served as an inspiration for the speech — for making it seem that the president was asking working Americans to give up some of the gains they had made in the post-war years to facilitate less consumption.
You say in the book that the fracturing of the liberal project was largely due to the inflation shocks of the 1970s. Do you think that it can really be held fully responsible for the sense of hopelessness — of malaise, even — that overcame the liberal establishment in those years?
JM: I actually think explains a great deal of it. As growth sputtered, there was less money for social projects. Meantime, the liberals did not seem to have an answer for inflation. In fact, they did but they could not stick to their guns because it required a long-term strategy of slowly unwinding inflation. That was probably politically infeasible. Too often, when something doesn’t work in time to have political potency, people abandon their ideas. Strong non-inflationary growth would have brought more people out of poverty and provided enough money for a national healthcare plan.
But the liberal project had some fallacies – the fallacies of excess. Unions did push wages too high in some areas and created an inflexible economy in some industries. Other non-union salaries followed suit. Some liberals could not face the need to reduce the wage share of the economy. This was their problem.
Carter was a fiscal conservative, mostly a true blue Republican in this regard. He tempered it with true caring about the poor and unemployed. He had an unimaginative response to what he saw as an age of limits. We wanted too much, such as oil, and this caused inflation. Let’s want less. Not a strong message, really, and it was wrong.
But if there had been no serious inflation, the progressive tendencies may have survived their enemies – especially those who thought any social programs were giveaways to the lazy and unworthy.
PP: Correct me if I’m wrong but I believe that there was much buzz about wage and price controls in the liberal establishment of the era. Nixon, of course, had given them a half-hearted shot in the early 70s but the innate conservatism of his economic advisers had ensured that they couldn’t be used effectively. My feeling is that these would have worked if given half a chance – after all they had been remarkably effective under Galbraith in the far more extreme environment of WWII. So, why weren’t these taken as a serious policy option by the liberal establishment of the era? Surely they would have been a ‘quick political fix’ if there ever was one.
JM: Wage and price controls had already been developed before 1971, when Nixon imposed them. But Democrats still were favourably on balance. John Kenneth Galbraith had imposed the controls as part of his government duties during World War II. The nation also had some success with them in the Korean War. Paul Volcker, then a key economic advisor for Nixon, definitely favoured them but Nixon stepped on the gas by huge fiscal spending to drive up the economy when he had the freeze so that he could get re-elected.
His wage-price freeze simply was not a serious attempt. He then undid them too abruptly. The Democrats considered them in the Carter term and did indeed impose ‘guidelines’. These could have worked if they had been willing to stick with them but Carter wasn’t willing and the nation was changing, as I noted. Market solutions, not government interference was generally gaining the upper hand ideologically and the Democratic economists never fought back with sufficient determination.
PP: But that means the solutions were there if the Democrats wanted them and they were well aware of them. That they didn’t pick them up and put them into practice means there must have been some sort of cultural shift or moral malaise; it seems to me that this is the only thing that can explain liberals’ flakiness in this period. Maybe your point about the Watergate scandal and the Vietnam War destroying confidence in government might explain this reluctance to wield power? Could you talk a bit more about this?
JM: Yes, as I have been saying there was a cultural anti-government shift in opinion and in the media. This is my main point. Liberals could have fought against it but did not. It wouldn’t even have necessarily worked politically. They would have been pushed out of office unless they were persistent and determined. They were not. In fact, many Democratic economists had strong doubts, already participating in the shift towards laissez-faire attitudes.
The ‘malaise’ was really just simple pessimism. Nothing had seemed to work for years to solve the economic problem of inflation. Carter actually never used the word ‘malaise’ in his speech – but the key point is that he was no good at puncturing the pessimism. Reagan, the mythmaker, was remarkably good at it.
PP: That was going to be my next question. Reagan was, of course, a master orator and a man of considerable charisma and charm. Nevertheless, even without considering his personal qualities, his message seemed to resonate with the times. Could you talk a little about Reagan and how he ‘clicked’ with the American public at this important moment in history?
JM: Well, it is important to remember that he didn’t click national at first at all. He won in California as governor at a time when the state was disturbed about racial issues and the Berkeley free speech movement. He talked tough and his opponent did not take him fully seriously. Then he governed not quite as conservatively as he talked.
What he did best was to understand the concerns of working people, which was his heritage. He didn’t believe – and this is widely misunderstood and misreported – in Friedmanite self-interest. He believed in individuals – that hard work would pay off and we could make our own lives.
He kept trying to get the presidential nomination – in 1968 and then again in 1976 – and failed. But while he failed, he did countless radio speeches – short essays – which forced him to develop his opinions in many areas. He understood the value of a simple story with a cathartic climax. He was conscious enough of his intentions to write this in so many words.
But he was always a Manichean over-simplifier. There was, as in Hollywood, always a bad guy. Early, when he was a New Dealer, business was the bad guy. In the 1950s, he switched; government became the bad guy. As of course was the Soviet Union in international affairs.
When the nation’s views turned in the 1970s, he exploited this well. He stuck to his guns for more than twenty years and his moment came. He radically cut taxes and regulatory staffs, and extended the angry attitude of Americans towards government to tragic ends.
PP: You say that his popularity in California was disturbed by racial issues and the free speech movement – in essence, California was disturbed by what have come to be known as the ‘sixties’. Do you think that the ‘sixties’ and the attitudes that grew out of them had wider and broader cultural effects? Do you think they helped facilitate the turn to Reagan’s rhetoric of ‘individual responsibility’, responsibilities rather than rights; in short, the turn to conservatism?
JM: Yes, there was a reaction to the new social policies and ‘looser’ lifestyle of the Sixties. The social policies had many angry – they mostly helped people of colour, it was thought, or ne’er do wells. There has always been that strain in American politics, this time tinged with racism because of the Civil Rights Act and integration. Also, liberals went too far with busing.
But the catalyst was still the bad economy. There always would have been a pendulum swing, but it probably would have been modest as baby boomers became adults with families.
PP: Let’s move on to Alan Greenspan. In your book you portray Greenspan as a rather mediocre figure, as far as ideas and economics goes. This runs counter to the narrative we’re all used to — the narrative of the ‘master of the universe’ with his finger firmly on the pulse of the world economy. You portray Greenspan as a savvy political player and a free-market ideologue in the crudest of sense, but little more than that. Could you talk about this a little bit?
JM: I certainly would not call Greenspan mediocre. He was a competent Wall Street economist with great talent for networking, assessing the political winds, and positioning himself in a niche where there was little competition – that is to say, articulate Republican economists in the 1970s. He could talk persuasively to businessmen and politicians alike.
But he was, as I say, a Wall Street economist who did not have a sophisticated model of the economy, but instead a by-the-pants model. He also an ideologue with a simplistic notion about laissez-faire economics that he partly derived from the views of Ayn Rand. He suppressed these views, but as his reputation rose, he became more confident that less regulation of financial markets was ideal.
It was based on the most simple ideas about the moderating value of competition. They were decidedly pro-business which, as I explain in the book was probably a leaning he had since childhood. As a Fed chairman, he was intent on suppressing inflation above all other things, also a reflexive Republican attitude.
His actions to keep rates down in the late 1990s have been misinterpreted. He kept them down less because he believed in a new economy than his fears about the financial crises over Long-Term Capital Management and Russia.
In the end, he had more to do with the financial crisis than any other single individual because he refused to regulate and oversee the financial community properly. He insisted derivatives needed no serious regulation. This was purely ideological. He approved of the merger that resulted in Citigroup. He had no idea of the level of risk on Wall Street that he more than anyone else was responsible for.
PP: Perhaps I shouldn’t have used the term ‘mediocre’. My impression from your book was that Greenspan was not much of a theoretical economist – as you say, he was more of a ‘hands on’ kind of guy with an overarching ideology. Do you think that this led his policy in many ways? Purely practical people tend to only pay attention to flaws in a system when things start to go wrong – should such a person truly been in charge of the Federal Reserve?
JM: I don’t think you have to be a theoretical economist to run the Fed. Greenspan didn’t get a PhD but even that need not be an obstacle. He was an ideologue who suppressed his ideology. His one fight was against inflation. He was determined to be as good as Volcker at beating it down. Like most Republicans, he wanted to show that he was tough. His economic analysis was more ground in day to day changes in the economy with little sense of economic dynamics or Keynesian disequilibria or long-term damaging equlibria. For these more subtle concepts, he’d have no sympathy. My personal view is that he was guided by the bond rate. If it went up fast, it meant there were inflationary expectations which he was determined to beat down. He overkilled on inflation, of course. But he also backed off in the late 1990s. Many attributed this to his prescience about the New Economy, regarding which he had sophomoric views. He kept rates down, instead, because of the economic crises in Asia, Long term capital management and in Russia. He suppressed his ideology for a while but as the adulation for him increased, he became increasingly ideological – much to the detriment of us all. He was more responsible for this crisis than anyone else by far. And that was purely down to his ideology.
PP: Okay, let’s move onto Clinton. I was surprised he wasn’t included in your book. Carter was there but not Clinton. Yet, Clinton’s administration oversaw some of the most substantial deregulation of any period which culminated in the elimination of Glass-Steagall. Clinton also oversaw what some might consider a sort of mania for a balanced budget – one that may well have pushed the household sector into a net borrowing position. The Clinton period was also the time when asset bubbles began to seriously float deficient economic growth – I refer, of course, to the DotCom bubble. Could you talk about all this?
JM: I talk about Clinton quite a bit in the book, as you know. More deregulation occurred during his administration than others. But much of the story is familiar. I tell this story through Wall Street and Alan Greenspan. In particular I discuss how Bob Rubin and Larry Summers convinced Clinton that any surplus be put back into the bond market. I also cite Clinton’s claim that it was the end of the era of big govt.
But the big trends were already underway when he took office. Clinton did not stop them. The mania for budget balancing really began in the 70s. It intensified in the 80s with the Reagan deficits. George HW Bush was determined to tame them and had a tax increase passed. Then came Clinton’s tax cuts and they seemed to work.
Meanwhile Greenspan raised interest rates unnecessarily, akin to a kind of shock therapy. Rates came down and a boom got underway, supported more by financial asset inflation than was realized. Ever the fantasist, Greenspan pinned it on high technology and allowed rates to fall more. But Clinton, only and always trying to get credit, attributed it to the tax increase and a balanced budget. Rubin believed that this reduced the crowding out of private borrowing. Never mind all the financial crises in Asia, Wall Street and Russia. Greenspan just stepped on the gas, lowering rates and all the while alluding to a new economy which was at best partly true. Under Clinton the Democrats became the Wall Street party and his refusal to support regulation of derivatives in 1994 and 1999, under the guidance of Rubin, the former Goldman Sachs co-chief, and Larry summers, the former Keynesian, eventually led to a terrible debacle. They greatly admired Alan Greenspan and never crossed him. Keep in mind, much of the Democratic congress went along. Wall Street got a hold of Washington – and they never let go.
PP: Sorry, I should have said that you didn’t give Clinton a section in the book — of course you do talk about his policies.
I want to talk a little more about the balanced budget. The notion that a budget should be balanced all the time appears to me farcical. Not simply from an economic perspective but also from an historical perspective. Most of the time most developed countries run deficits — if they didn’t they wouldn’t have stocks of public debt. There is, in my mind, without a doubt a link between unbalanced government budgets and capitalist economies.
Yet, the idea of balanced budget has been something of a millstone around the necks of liberals and progressives since at least as far back as Roosevelt. Why do they let the other side lead the debate in this instance? Why do they cling to balanced budgets when it seems so obvious that unbalanced budgets are the historical norm?
JM: Quickly, balancing budgets goes back much farther than FDR. After all, excessive government expenditure, especially on war, has brought down many governments over the centuries. Modern theory suggests budgets should be balanced over the course of the business cycle – not all the time. I don’t agree they need be balanced over the cycle, though. I think there is probably an endemic insufficiency of demand due to inadequate wages, so a persistent, if not constant deficit makes sense. Also public investment will have a positive rate of return – usually.
But balancing the budget is a political football. The Right demands it. They always claim it leads to inflation and crowding out. The Democrats like it when the Republicans run a deficit as under Reagan and George W Bush. There is both hypocrisy and bad economics involved in the whole deficit discussion, unfortunately.
PP: I’d tend to agree with pretty much all of that.
Moving on to the present day after all that was built over this era has collapsed in upon itself, what do you think the future holds? I mean that both from the perspective of regulation — I note that Regulation Q, the bypassing of which you portray in the book as a pivotal moment, just two months ago was cut back to allow interest to be paid on checking accounts. And then there’s the issue of actual economic growth which seems mired due to government reluctance to pick up the mantle after beating themselves down all these years?
In these respects what do you make of this brave new world?
JM: I find it hard to believe that more policymakers, editorial writers and pundits don’t ask whether Wall Street should have as central a purpose in our economy as many take for granted. We should be asking whether Wall Street – that is, the financial community – is justified at all in its present size. The main question my book raises is whether the financial sector does more harm than good. Those who are for re-regulating of Wall Street, including Dodd-Frank and the Obama administration, have never gotten to first principles though. The regulation as proposed will not adequately cut the Street down to size. The institutions should be cut in size and streamlined along product lines that reduce conflicts of interest. Those that take federally guaranteed deposits should be ring-fenced. Those that underwrite or privately place securities should not take deposits and have no access to the Fed discount window. Speculation has to be seriously limited to small institutions through the use of higher capital requirements.
At the same time, a few legal actions have been taken against unethical practices on Wall Street. It is remarkable that so few criminal charges have been made, and that civil cases are settled through relatively small fines to avoid going to court. Fraud law, both legislative and common law (tested by brining cases), must also change.
Without adequate changes that ensure that Wall Street channels money to productive uses, America will have a hard time getting money where it is needed in the economy.
In the meantime, this administration believes that all it needs do is to revitalize finance and credit and this would re-inflate the economy. At the same time no serious attempt was made to make mortgage holders whole – at least in some degree – which is a tragedy.
People are frustrated. A mid-July survey found that most Americans believed Wall Street did more harm than good. My book is about showing how that happened – and indeed, without doing a statistical analysis, I think the book shows that it did happen.
Pair this with the mistaken assumption that fiscal austerity is required to re-structure the US economy, and we probably face a very hard time ahead.
Other nations, on the other hand, have asked the question about the purpose of finance and proposed more stringent solutions, such as the Vickers Commission. Maybe that’s a start.