HOW TO SAVE CAPITALISM Fundamental Fixes for a Collapsing ...signallake.com/signallake.com/innovation/HowToSaveCapitalismNov08.pdf · A Forum with James K. Galbraith, Michael Hudson,

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HARPER’S MAGAZINE / NOVEMBER 2008 $6.95

HOW TO SAVE CAPITALISMFundamental Fixes for a Collapsing System

A Forum with James K. Galbraith, Michael Hudson,Eric Janszen, Barry C. Lynn, Bill McKibben, Joseph E. Stiglitz,

Elizabeth Warren and Amelia Warren Tyagi

USEFUL AMATEURSHow the Smearing of Barack Obama Got Crowd-Sourced

By Ken Silverstein

Also: David Means and David Foster Wallace

R O G E R D . H O D G E : S T E A L T H I S E L E C T I O N

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F O R U M

HOW TO SAVE CAPITALISM

Fundamental fixes for a collapsing system

If the financial debacles ofthe past decade—the enormous bubbles, the credit col-lapse and its trillion-dollar consequences—have taughtus anything about the American economy, it is thatcapitalists have done a remarkably poor job of safe-guarding the future of capitalism. Our system became sodominated by finance, insurance, and real estate, and bythe complex derivative securities these industries en-gendered, that the most eminent financiers (and their un-sleeping computers) were unable to protect us from eco-nomic shocks. For a number of years, farsightedcommentators—including in this magazine—warnedof the looming credit collapse, and yet the masters of oureconomy took no action until the crisis was alreadyupon us. Now we must not only repair our tenuous fi-nancial system but shore it up to withstand two great,gathering storms: dwindling energy supplies and accel-erating climate change. To this end, Harper’s Magazineasked a group of leading economic thinkers to offersweeping but concrete proposals for the rescue of capi-talism, and capitalists, from doom.

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36 HARPER’S MAGAZINE / NOVEMBER 2008

From the seventeenth-century tulip mania tothis century’s housing bubble, economies havebeen susceptible to the quest for the easy buck.Clever people will invariably circumvent regula-tions and accounting standards; they will seizeopportunities to prey upon the poor and the ill-informed, to profit by selling the notion of the freelunch. By now most people are aware that over thepast five years the financial sector has made badloans and extremely risky bets, that defaults on theloans and record losses on the bets have serious-ly damaged the nation’s (and the world’s) econ-omy. The downturn is likely to be so severe part-ly because we have succumbed to the opinionthat markets work best by themselves, unfetteredby government regulations. But the people mak-ing this argument are the ones who have beenserved well by it. We can do far more to protectagainst self-interest. In particular, we need to im-prove the incentives that drive those in the financeindustry, so that their interests align with those ofthe society and economy they are meant to serve.

The financial sector is supposed to allocate cap-ital judiciously, making sure that it goes to areaswhere returns, when adjusted for risk, are highest.

When capital is well distributed in this way, theeconomy is more likely to flourish in the shortterm and grow steadily over time. Capital marketsare also supposed to manage risk, transferring itfrom those parties less able to bear it to those thatare more able to do so; distributing risk in this man-ner encourages entrepreneurship and stabilizesthe economy. In return for performing this pub-lic service, the financial markets are generouslyrewarded—in recent years they have garnerednearly a third of all corporate profits.

The financial system is supposed to do thesethings. But it is clear that America’s financialinstitutions have not managed risk; they havecreated it. The industry allocated hundreds ofbillions in bad loans to an inflated housing mar-ket, resulting in the greatest number of foreclo-sures since the Great Depression. With economicgrowth currently at a dreary 1 percent, there is al-ready an immense gap between what we are nowproducing and what we could be producing ifthis crisis had not occurred—a cumulative loss Iestimate will be in excess of $2 trillion.

Too many bankers and other lenders have beenfocused on trying to beat the system by gettingaround accounting and banking regulations(through what is called accounting and regulato-ry arbitrage). Indeed, with bonuses based on short-term profits, they had every incentive to gambleand connive. And now that there’s a bust, no oneis being asked to pay back the hefty bonuses earnedduring the boom. On the contrary, even as theyare dismissed, those who helped send their firmsand the American economy into a tailspin arerewarded with generous severance packages. Theyare enriched regardless of what happens to in-vestors, homeowners, and others who lost so much.Unless we reform incentives, the financial sectorwill only try to circumvent whatever new regula-tions are put in place. We will simply have a shortrespite before the next crisis.

One major problem with incentives involvessecuritization. The selling and reselling of mort-gages, with payments chopped into thousands ofpieces, creates a new set of information asymme-tries, as buyers of securitized mortgages have less in-formation than the originators of the mortgages.To be sure, both investors and regulators shouldhave recognized the scam. But as mortgage origi-nators realized that buyers of securitized mortgagespaid little attention to who was taking out theloans and on what terms, they pushed through asmany loans as they could, regardless of their risk,and they invented ever more complex and pre-

Joseph E. Stiglitz is University Professor of Economics atColumbia University and winner of the 2001 Nobel Prizein Economics. His most recent book, with Linda Bilmes,is The Three Trillion Dollar War: The True Cost of theIraq Conflict.

Illustrations by Raymond Verdaguer

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realign the interests of wall street

By Joseph E. Stiglitz

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carious financial products that no one—not eventhe originators themselves—fully understood.Loans requiring that less interest be paid thanthe rate at which it accrues, so that the level ofdebt increased over the course of a year, were soldon the premise that housing prices were only go-ing to rise. A simple regulation requiring mortgageoriginators to put their own money at risk in eachtransaction—say, 20 percent of the loan amount—could curb these abusive practices.

Multiple conflicts of interest in our finance in-dustry also have led to the rewarding of socially de-structive behavior. The worst culprits have beenthe rating agencies, which are paid by the com-panies whose financial products they were sup-posed to be evaluating and which make money byconsulting with their clients on how to get AAAdesignation. These financial alchemists announcedthat the lead of subprime mortgages had beentransformed into golden products safe enough tobe held by pension funds. Without this collusion,the whole system of deception would not haveworked; there would not have been the flow offunds that sustained the subprime mortgage in-dustry. Neither banks (including now investmentbanks) that can borrow from the Federal Reservenor pension funds that are responsible for man-aging other people’s money should be allowed tobuy or sell risky and non-transparent products.

Finally, we must change how financial execu-tives are personally compensated. We should re-quire that stock options be subject to “expens-ing” (a more transparent accounting that makesclear their full costs). The present stock-optionpayment structure encourages CEOs to take ac-tions that bloat the short-term reported profits ofthe firm, thereby inflating the share price, andeveryone (except the executives in the know)eventually loses as a result. Their pay must bebased on long-term performance, and they shouldshare the losses, not just the gains.

Certain masterminds of Wall Street exhibitedgreat ingenuity in creating new, highly complexproducts capable of evading accounting rules andtaking full advantage of the housing frenzy. Butas they were getting rich off these innovations,they failed to design products that help reduce therisks faced by most people in the housing market.Mortgages that would make it easier for Ameri-cans to keep their homes as interest rates rise orthe economy spirals downward can be developed.But those in the financial sector have been fixatedon their own annual bonuses.

Adam Smith argued that in serving their owninterests individuals were led “as if by an invisiblehand” to serve the interests of society as a whole.But once again we see that only with the right re-wards can these interests actually be joined. ❖

What is the purpose of a corporation? InAmerica today we generally believe that corpo-rations exist to generate profits for their share-holders, who “own” them. Indeed, we havestructured much of our economy—and oftenstaked our retirements—on this idea.

Not many years ago, though, most Ameri-cans would have found such thinking absurd.From the nation’s earliest days until the 1970s,Americans saw the business corporation mainlyas a practical tool of development. The aimmight be to build a bridge, or to manufacturesteel, or to transport people from one city toanother. The private corporation was simplythe institution best suited—usually, but not

always—to organize and govern such work.Profits were a part of the system. After all, theonly way to attract capital is to pay for it. Butthe manufacture of cash was a distinctly sec-ondary goal.

Barry C. Lynn is a senior fellow at the New AmericaFoundation and author of End of the Line: The Riseand Coming Fall of the Global Corporation. His lastarticle for Harper’s Magazine, “Breaking the Chain:The Antitrust Case Against Wal-Mart,” appeared in theJuly 2006 issue.

abolish stock

options

By Barry C. Lynn


Our society lives with many fictions, andmost do us little harm. But there is a big prob-lem with viewing corporations as privatesources of paper “wealth” rather than as publicsources of goods and services. It’s not that theformer idea is technically wrong, thoughAmerican law is very clear that the businesscorporation is not a property and cannot be“owned.” The problem is that our efforts to ex-tract cash from these corporations leads us in-creasingly to degrade—and in some cases todestroy—some of our most important produc-tion and service systems at the very momentwe should be making them more robust andopen to new ideas.

I thought of this problem recently when in-vestors pushed General Electric CEO Jeffrey Im-melt to put up for sale his firm’s Consumer & In-dustrial Division, the heart of GE’s business since1892. I don’t own GE stock, but if I did I wouldwonder which best served my interests—for thecompany to sell its 125 years of expertise in elec-trical systems to some lesser firm, and thereby todirect a few dollars into my accounts; or for GEto retain that know-how, perhaps depressing itsstock price in the near term but enriching us allthrough the improved efficiency of our refriger-ators, transformers, and light bulbs.

In fact, I’ve been forced to think about thedestructive powers of shareholder “activists”all too often over the past year or so, as fundmanagers claiming to be “owners” (or agentsfor “owners”) have busted into the decision-making processes at all sorts of firms onwhich we depend—Motorola, General Mo-tors, Yahoo!, Boeing, The New York Times,Hertz, and Freescale Semiconductor, amongothers. The problem is not change: every en-terprise must adapt to its day. The problem iswho decides what to change, and what moti-vates them. Firms such as Google and Toyotaand machine-tool maker Mazak still do agreat job of delivering better products andservices. But these enterprises are run bymanagers who figured out how to insulatetheir executive suites and R&D operationsfrom rapacious fund-runners. In a growingnumber of industrial firms, the scientists andengineers and machinists we rely on to deviseand build what we need tomorrow lack thepower to do so. Those who have power—be itbillionaire investor Carl Icahn or California’spension fund—know little about the systemsthey control. So like any absentee landlord,they blithely demand more than soil or serfcan yield.

There is one easy way to get the managers ofour corporations to focus more on making next-generation products and less on piling up cashfor themselves and the fund managers they

serve. And that is to eliminate, or at the veryleast to alter radically, the stock options thatsince the early 1990s have become such a hugepart of executive pay packages. Back then, op-tions were promoted as a way to bring the self-interest of managers more in line with that ofshareholders. This is exactly the problem. Theold antagonism between “professional” man-agers inside the firm and the masters of capitaloutside it helped ensure a balance between actsof creation and acts of destruction.

In America, the modern manager emergedduring the late nineteenth century in tandemwith the limited-liability corporation. As theseprivate governments grew bigger, so too didfears that a largely self-selecting corporate elitewould abuse their authority, economically andpolitically. The New Dealers’ aggressive use ofthe IRS, antitrust law, and other state powersseemed to solve this problem, and by the 1950smanagers were wont to present themselves as“corporate stewards” whose job was to serve“stockholders, employees, customers, and thepublic at large.” These managers knew theircompanies intimately: in 1950 nearly 40 per-cent of CEOs had forty or more years of experi-ence with their firms. And they had an incen-tive to ensure the long-term health of theactivities entrusted to their care, because thebest way to keep the plush office and perks wasto invest in the people and ideas necessary forthe company to grow.

This balance was upset by two actions. TheReagan Administration’s overthrow of an-titrust law in 1981 freed investors and man-agers to create larger firms less regulated byhorizontal competition and hence less com-pelled to refine their products and systems. Theexplosion of options and the linking of earn-ings to short-term stock-price fluctuations com-pleted the transformation of the CEO from tri-bune of the industrial arts to Shareholder #1.

It would be wrong to view the old way as per-fect. The New Dealers, like the progressive-erareformers before them, failed to resolve thehuge constitutional questions posed by the of-ten necessary concentration of immense powerwithin industrial corporations. But the ad-hocbalances they achieved were far safer than theone-sided dictatorship we see today. We shouldnot allow investors to scatter the people, ma-chines, and ideas entrusted to our great indus-trial firms any more than we would allow themto shutter or sell off the physics departments atMIT and Caltech. The time is long past to shiftcontrol over these vital activities away from themassed mindless appetites of Wall Street andentrust them instead to teams of human beingsfreed to use their powers of reason, and reward-ed for doing so. ❖


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Go into any appliance store in America andlook for a toaster with a one-in-five chance ofexploding. You won’t find one. But at anymortgage brokerage in the country it has beenpossible to purchase a loan with a one-in-fiveforeclosure rate, and the broker doesn’t evenhave to tell you the odds. Why the difference?Toasters—like every product you touch ortaste—are tested for safety. When a babystroller or an eyeliner is discovered to be dan-gerous, it is removed from the shelves. Yet fi-nancial products go unmonitored for basicsafety. When shopping in the complex andconstantly evolving financial market, whereactual costs and unfavorable terms are regular-ly concealed, consumers are on their own.

For most of the country’s history, state and lo-cal usury laws imposed modest consumer protec-tions by setting caps on interest rates and fees. Butin 1978, a federal statute was used to bypass theselaws. Creditors quickly rewrote the rules, issuing un-intelligible contracts that increased fees, penal-ties, and interest rates. The fragmented financialregulatory bodies that remain have operated as iftheir main goal were lender profitability. Real

oversight has been left mostly to a handful of con-sumer advocates who struggle to examine and re-view hundreds of complicated financial productsand publicize problems while financial institutionsspend about $100 million each year lobbying Con-gress for less regulation and more privilege. Theever-widening information imbalance betweenconsumers and creditors has only made borrowerseasier marks. In a Federal Trade Commission studyconducted last year, for instance, nine in ten mort-gage customers examining relatively straightforwardfixed-rate loan agreements could not figure outthe up-front costs on the loan; half could not iden-tify the loan amount. Of all the borrowers who weresold subprime mortgages in the past five years,nearly 60 percent would have qualified for primemortgages if brokers had offered them; the sub-prime mortgages carried so many rate escalators,prepayment penalties, and other traps that evenwould-be prime borrowers defaulted.

It is time we created the equivalent of a Con-sumer Product Safety Commission for financialproducts, an agency whose purpose would be toprotect homebuyers and investors from the fi-nance industry’s most dangerous offerings. TheFinancial Product Safety Commission couldmodel itself after the best from the consumerregulatory agencies. For instance, the head ofthe new agency would be appointed by the pres-ident, and its staff of professionals would havecivil-service protection and thereby be immuneto changing political winds. Although the FPSCwould have no hand in setting prices, it wouldbe able to require that companies reveal the truecost of credit. This seemingly small requirementwould force into public view essential informa-tion about terms and risks that has long beenmasked and withheld. To achieve this end, theagency could do something as basic as reviewingproduct disclosures, making sure they were easilycomprehensible to the average reader.

The FPSC would also “test” products for safe-ty before they had a chance to reach consumers.When the commission found undisclosed feesor bait-and-switch credit modeling, it could al-low the offender a period of time to fix the prob-lem, giving lenders the opportunity to minimizegovernment interference. But if a lender failed toact within, say, six months, the agency couldimpose its own regulations: eliminating confus-ing paperwork, requiring effective disclosures,and, when necessary, banning outright the mostdangerous traps. Standards would evolve overtime, with the agency employing financial experts

Elizabeth Warren is the Leo Gottlieb Professor of Law atHarvard Law School. Amelia Warren Tyagi is COOand co-founder of Business Talent Group. They are au-thors together of The Two-Income Trap: WhyMiddle-Class Mothers and Fathers Are Going Broke.

protect financial consumers

By Elizabeth Warren and Amelia Warren Tyagi


capable of keeping pace with the industry’s abil-ity to constantly create new and dauntingly ex-otic products.

Because risk is an intrinsic part of most finan-cial transactions, a Financial Product Safety Com-mission would not—and should not—preventevery financial mistake. But the agency would al-low consumers to make informed decisions aboutthe amount of risk they want to take and wouldprotect them from unscrupulous practices thatdisguise the dangers. The FPSC might evaluateloans and credit-card agreements using standardssimilar to ones employed by other agenciesconcerned with consumer safety: Is a reasonableconsumer likely to get hurt by this product? Isthe information provided complete and helpful,or is it designed to create a false sense of safety?Will this aspect of the product’s design provide ameaningful service to consumers, or will it confuseand mislead them? Is the malfunction rate—thatis, the default rate—reasonable, or is it unac-ceptably high? Each year millions of credit-card of-fers go out with tiny print detailing “double-cyclebilling” and “trailing interest,” terms that haveenormous financial implications but are mean-ingless to most people. Likewise, such products asmortgage prepayment penalties are slippedsurreptitiously into agreements for the sole purposeof trapping people into loans that they otherwisewould not likely take on.

Industry advocates claim that any safety reg-

ulation would constrict credit, particularly tothe poor. But the FSPC would restrict only a fi-nancial company’s ability to profit from decep-tion and obfuscation—practices that lendersmore frequently employ on low-income borrow-ers. Unlike the hard cap on total charges set byusury laws, which if too low actually doessqueeze off credit to those who really need it,these regulations would merely require honestrisk-based pricing, with all the costs and termsmade clear up front. Consumers who can seethe total cost of a financial product before pur-chasing it are no doubt better able to determinewhether it is something they can really afford.

The ingenuity of the past thirty years has led toastonishing changes in our consumer goods. Frozenfoods, televisions, and plain old toasters havebeen made not only more efficient, user-friendly,and varied than they were but also less expen-sive. And all of this was accomplished even asthe products were held to increasingly higherstandards of safety. But over the same period oftime, innovation without sensible regulation in thefinancial sector has brought a subprime mortgagemeltdown, credit-card contracts that have ex-panded from one page to more than thirty, andpayday loans that charge annual percentage ratesof over 900 percent. The world of physical prod-ucts has become safer, while the world of finan-cial products has become far more dangerous.That’s a problem that can be fixed. ❖


To save industrial capitalism, we might be-gin by looking at changes sought by classicaleconomists. Reformers from Adam Smith toJohn Stuart Mill to Thorstein Veblen hoped tostreamline industry and increase economiccompetitiveness by doing away with the specialprivileges inherited from feudalism; namely,“economic rents” earned from longstandingland, monopoly, and banking rights. Incomefrom these entitlements added to the cost ofdoing business but neither produced anythingtangible nor spurred technological innovation.Classical economists contended that the taxburden needed to be shifted off of industry and

labor and onto that which was taken from na-ture or granted by government decree—whatMill called the “unearned increment” thatlandlords extract “in their sleep.”

In the United States, progressive-era reformsadvanced many of these ideas, and by WorldWar I the nation was well on its way towardachieving what John Maynard Keynes wouldcall “euthanasia of the rentier.” The federalgovernment passed its first income tax in 1913,at a time when even more wealth than todaywas either inherited or derived from insiderdealings. Steeply progressive, the tax waslevied on only the wealthiest 1 percent of thepopulation (households earning more than$83,000 in today’s dollars), with their incometaxed at a marginal rate of 77 percent by 1918.Capital gains were taxed at the same level, onthe reasoning that they added to net worth justas earnings and savings did. These policies

Michael Hudson is Distinguished Professor of Economicsat the University of Missouri–Kansas City and the authorof many books, including Super Imperialism: The Ori-gin and Fundamentals of U.S. World Dominance.His last article for Harper’s Magazine, “The New Roadto Serfdom,” appeared in the May 2006 issue.

tax the land

By Michael Hudson


helped create a middle class in America, whilesimilar measures did much the same in Europe.

But the class that Franklin D. Rooseveltcalled “economic royalists” fought back andover time (and particularly after 1980) re-versed these progressive tax policies. The topmarginal tax rate for personal income hasbeen slashed, from a high of 94 percent in1944 to roughly 35 percent today. Capital-gains taxes are now capped at 15 percent, andthis tax is not even collected on the vast ma-jority of real estate sales, since commercialowners are not taxed if they use their salesproceeds to buy new property. As a sop tohomeowners, residential price gains havebeen made tax-free for the first $500,000.Rental income also has been rendered freefrom taxation by the accounting sophistrythat property is depreciating rather than risingin value, even when actual market prices aresoaring. At the state and local levels, prior to1930 some 70 percent of public revenue camefrom property taxes; today, only 21 percentdoes, with the difference made up primarily inincreased taxes on income and sales.

These tax breaks on property and capitalgains, along with the tax deduction for interestpayments, provide a powerful incentive forbuyers to go into debt; that is, to pay mortgageinterest to bankers for property they hope tosell at a gain. Thus, the income that govern-ments have relinquished through property-taxcuts ends up being paid by new buyers to banksas interest. Rather than funding new develop-ment projects, most savings have been turnedinto bank loans for housing that already exists,

“post-industrializing” the economy and burden-ing it with an overhead of non-productioncosts. We are far from the wealth of nationsthat Adam Smith imagined.

As reform-minded economists have long ar-gued, we must tax the rentiers. Taxing theirprivilege would yield as much as the presentincome and sales taxes combined, withouteating into the earned income of wages andprofits. For example, roughly half of the esti-mated $1.4 trillion rental value of all residen-tial and commercial real estate comes fromthe land on which buildings sit. The idea is totax not the buildings but this land value—sites that are provided by nature and that in-crease in value incidentally when a rail line ora Starbucks is built nearby. By taxing only theland, we would no longer be penalizing newconstruction and would discourage specula-tive hoarding. Indeed, in both 2006 and 2007the market price of land went up by $2.5 tril-lion. This increase in balance-sheet valuationwas not earned, since landlords did not haveto make an investment to create it; moreover,taxing these sites could help cover the costs ofnew development and would not reduce thesupply of land.

A related reform would abolish the tax de-duction for interest payments. In 2006, propertyowners paid $742 billion in mortgage interest,accounting for 84 percent of the total interestcollected by the financial sector. Assuming a 33percent overall tax rate, this deduction alonecost the Treasury a quarter trillion dollars. (Byencouraging debt financing rather than equityinvestment, this subsidy to mortgage lendershelped fuel the real estate bubble.)

The public also should own—or at least beable to collect rental revenue on—the na-tion’s infrastructure and the monopolies forwhich only one provider makes economicsense. The broadcasting and communicationsspectrum is just one example of immense pri-vate wealth that has been carved out of thepublic domain. (As with England’s landbarons, broadcasters received their right onthe condition that they fulfill specific publicobligations, which, over time, they came toresist.) I estimate that the broadcasting spec-trum, recently valued at $480 billion, ac-counts for another $100 billion in free eco-nomic rent. Other privatized natural resourceslose perhaps $250 billion more.

The total lost tax revenue on property, capi-tal gains, interest, and infrastructure is likelyupwards of $1 trillion, a significant share ofAmerica’s $12.4 trillion national income in2007. Instituting these taxes on land wouldmake it harder for property buyers to take onlarge loans for homes they cannot afford, a re-

FORUM 41



Can Capitalism survive? No. I do not think it can. —Joseph Schumpeter, 1942

The problem is not how to save capitalismbut how to save the unique and successfulmixed economy built in the United States overthe eighty-five years since the New Deal. Oursystem is not capitalism. Our economy has alarge public sector, which at its best was com-petently concerned with research, defense, fi-nancial stability, environmental safety, socialsecurity, and large measures of education,health care, and housing. Today, after thirtyyears of attack on government, all these func-tions are damaged and in peril.

The rot comes from predators posing as con-servatives and mouthing the rhetoric of “freemarkets.” They are not actually interested infree markets. Their goal is to use the govern-ment to build monopolies, to control re-sources, to block regulation, to crush unions,to divert as much as possible from taxpayersinto private pockets. They have a reckless atti-tude toward war-making and they put the fi-nancial system in peril by failing to enforcestandards of ethics and transparency. As a re-sult, they imperil the country’s credit in theworld. True conservatives recognize this,which is why they defected from Bush andMcCain long ago.

Our postwar system was built on technolog-ical leadership, financial stability, and collec-tive security. The world gave us credit andused our currency. Why? Because we gave itback the public goods of peace and economicprogress. We were the bulwark during theCold War. Our system wasn’t imperial: wespoke instead of community, of freedom, ofcommon purposes and common values, andthe world took us seriously because we hadpaid our dues.

The next successful system should be builton that model—that is, on the basis of regu-lated finance, collective security, and, aboveall, a national purpose. Since energy and cli-mate change will dominate the global agendafor the next generation and perhaps even thefollowing, dealing with these issues must be-come our generation’s purpose too. AlthoughAmerica is the world’s great energy wastrel,among developed countries we are the bestpositioned to change, to reduce our own fos-sil-fuel use and help the world do likewise.We have the science, the technology, the en-gineering, and the educational capacity totake the lead.

What we do not have is the capacity to figureout, in advance, a coherent national strategy to-

James K. Galbraith is the author of The PredatorState: How Conservatives Abandoned the FreeMarket and Why Liberals Should Too.

sult that would ultimately drive down the costof housing. Additionally, the money that wasbeing funneled to banks in the form of inflatedloan payments would now go to the govern-ment as taxes, thereby allowing income andsales taxes to be radically reduced. In all, a con-siderable net gain for Americans.

In our country and elsewhere, the transition

from a feudal economy to a modern one re-mains incomplete. Hereditary estates and mo-nopolies still retain huge privileges; taxes onproperty and rents remain at historic lows. Tax-ing these “unproductive” incomes would helpto unburden labor and enterprise, and thesechanges would go a long way toward fixingwhat ails our economic system. ❖

plan

By James K. Galbraith


ward this goal, and for using our government toadvance that strategy. We have no capacity toplan, and that is what we need now.

“Planning” has been a dirty word in Ameri-can politics for decades. For the hard-lineright, planning destroyed freedom: it was the“road to serfdom.” Anti-planners also thoughtit a failure; for them the collapse of theU.S.S.R. was due to “central planning.” Butwithout public planning, who is in charge?Lobbyists who represent the private planningof the great corporations. The public interestceases to exist, and the public sector becomesnothing more than a trough at which privateinterests come to feed.

What the government needs most today is toregain an independent capacity to think. Thegovernment needs a way to imagine the futurethat is not dominated by lobbies or even byCongress so long as Congress is dominated bylobbies. Planning is a process: thinking, coordi-nation, action. What is the long-term nationalinterest? What specific targets must be met?What is the best way to do it, and who playswhat role?

For instance, carbon prices and cap-and-trade systems will help to deal with the climatecrisis, but they cannot do the whole job. Mar-kets do not design new systems—new patternsof transport and housing, new technologies forelectric power, for vehicles, for heating andcooling. To design a system, to put the piecestogether, to identify the most promising linesof attack and take steps to achieve them: thatis the planner’s role.

Imagine a Federal Department of Energy and

Climate with real independence. It could makean honest evaluation of ethanol. It could re-view the prospects and assess the dangers ofnext-generation nuclear power. It could make ajudgment on carbon capture. It could considerall the serious conservation proposals, such asJoe Kennedy’s program to retrofit housing inthe snow belt. It could fund new research cen-ters in the major universities, so that in adecade the country will have trained the ex-perts we will need to implement the plans we make.

Planning is not coercive, but it should beprivileged. Once Congress approves a plan,budgeting and appropriation rules should favorpublic capital spending that implements theplan. For instance, such investments wouldnot be subject to “pay-go” restrictions; as long-term improvements, they properly should befunded by issuing long-term debt. The plan-ning process would thus parallel the budgetprocess, superseding it in the areas of infra-structure, technology, and environmentalmanagement that would be the main arenasfor the plan. Dealing with the energy and cli-mate crises will require direct public actionand the cooperation of the private sector,which will be achieved in part by regulationand standards. Clearly, the challenge is daunt-ing. But it’s not hopeless. If the country gets itright, all of us can have work for a generation,a better living standard afterward, and leavethe planet more or less intact. And in addi-tion, we stand a chance, otherwise improbable,of persuading the rest of the world to keep ourline of credit open. ❖

FORUM 43

Here, in brief, is the state of the Union.Home sales and prices have declined more inthe past year than in any year during theGreat Depression. Credit contraction hasspread to corporate borrowing and studentloans. Unemployment is rising in every statein the nation—except for tiny declines inArkansas, Oklahoma, and West Virginia,which benefit from higher energy and foodprices but together account for only one forti-

eth of the U.S. population. Unemployment inCalifornia, the most populous state, reached 7percent in June, up from 4.9 percent just twoyears ago, at the peak of the housing bubble.Debate continues over whether the UnitedStates as a whole has been in recession sincethe GDP contraction during the fourth quar-ter of 2007. But data ranging from retail salesto declining tax revenues serve as clear warn-ings that the recession may be ongoing. Evi-dence of economic contraction has been ob-scured, ironically enough, by the risinginflation that has been spurred by record ener-gy prices.

For twenty-five years, our economy has

Eric Janszen is president of iTulip, Inc., and formerlywas a venture capitalist and a CEO of technology start-ups. His last article for Harper’s Magazine, “The NextBubble,” appeared in the February issue.

reindustrialize

By Eric Janszen



been dominated by asset bubbles in the fi-nance, insurance, and real estate (FIRE) sec-tor. But now the FIRE-economy era is over.Within two years, the United States will be inthe grip of a modern inflationary depression.Look around and you can already get a senseof how it will go: rising unemployment, fallingwages, rising prices. This is what happens tocountries that become dependent on foreignborrowing to fund current consumption andthe operations of government and that relytoo heavily on asset-price inflation to produceincome. As the system winds down, demandfalls and purchasing power is lost. Considerwhat happened to Argentina: its per-capitaincome was once higher than that of Japanand Italy and comparable to that of France.But its economy collapsed, in part from theweight of decades of fiscal profligacy—in par-ticular the country’s dependence on foreignborrowing to finance government. Fortunatelyfor the United States, our debts are long-termand owed in our own currency; our creditors,now largely foreign central banks rather thanprivate institutions, can merely manage thedollar down, as has happened since 2002, withthe dollar depreciating more than 39 percent.Call the process Argentina Lite.

Rather than allowing our government toengineer another bubble (all our bubblessince the 1980s have involved the govern-ment creating—through tax subsidies, loanguarantees, and loose regulatory policy—aninitial market for speculation that thenmetastasizes), we should use the governmentto lay the foundations for a reindustrialization

of America. We can do this in two ways.First, get government out of the way ofprogress by removing subsidies for uncompeti-tive companies. We can’t expect private capi-tal to compete with, for example, the currentproposed $95 billion tax break for the di-nosaurs of the American auto industry. Sec-ond, and more important, we should removegovernment subsidies of FIRE industries. Thismeans not just ending the mortgage-interestdeduction but also breaking up Fannie Maeand Freddie Mac into parts and selling themon the open market. By removing our struc-tural support for the FIRE sector, we wouldfree up billions of dollars of capital for boththe private and the public sectors.

That capital, in turn, could be invested inAmerican infrastructure. We need high-speedrailways, ubiquitous high-bandwidth wireless,and nuclear energy, but we currently have adysfunctional market dynamic that is stoppingus from making these improvements. It’s achicken-and-egg problem: private industrycan’t bring more efficient cars (say) to marketwithout significant infrastructure funding tobuild alternative fueling stations, but mean-while the delay in these technologies promptsthe government to lavish ever more money onthe old, inefficient industries in order to pre-serve jobs. To break that cycle, we need gov-ernment to actively envision the infrastruc-ture projects we need and then arrange theirfunding by private investors as well as by pub-lic money. The right approach here is onethat has already been used to great success inEurope: “public-private partnerships”; i.e.,corporations owned partly by private investorsand partly by the government, created for thepurpose of developing and executing large-scale public works. For each major project an-nounced by the federal government, multiplepublic-private partnerships could bid competi-tively for the business (much like prospectiveOlympic host cities do). Progress on projects,public information reported quarterly, wouldcreate incentives for efficiency through thestock price. The best PPPs would be rewardedwith the highest stock price for producing thebest infrastructure “product” on time and on spec.

Once a bid was accepted, individuals couldinvest money in the partnerships directly, ina fashion similar to how the Treasury Depart-ment and certain states (Massachusetts andCalifornia) currently sell bonds to Americansover the Internet, cutting out rent-levyingbanks. Moreover, citizens’ federal taxes couldbe deferred, up to a limit, so that they couldpurchase infrastructure securities. These secu-rities would become a bedrock investment for

B


Here’s the thing about “capitalism”: in ourfixated belief that it represents the way God or-dained the universe to be, we forget what pow-ers it. I don’t mean the invisible hand—I meanthe coal, the gas, and the oil.

Keynes once tried some back-of-the-envelope calculating to see how much the hu-man standard of living had increased between

2,000 B.C. and the beginning of the eigh-teenth century. Maybe, he said, it had dou-bled over all that time, mostly because we hadlearned very little new—we had fire andwheels and banks and governments and live-stock and sails before history was ever record-ed. But then we did learn something new. Welearned how to take fossil fuel buried beneaththe ground and use it to create power, givingeach and every one of us (in the West, atleast) the equivalent of a few hundred slaves.And so, for a time, we doubled our materialstandard every few decades.

That time may be coming to an end, becausefossil fuel is coming to an end. We’ve got a mil-lion equations to explain how to make theeconomy work, but those equations rest on allthat coal and gas and oil. The gas and oil aregetting scarce, as anyone who drives by a gasstation can see: with supply plateauing and de-mand rising around the world, the price justkeeps shooting up. And if we’re smart, we won’tuse much more of the coal, because the carbonit contains is more than enough to once and forall unhinge the planet’s climate. You can seethe systems of our economy starting to shudderand lurch—the airlines, say, trying to cut thenumber of flights by 10 and 20 and 30 percentin a year because their oil costs are spikingmuch faster than they can raise fares.

It’s not just around the margins that the sys-tem is beginning to buckle. It’s right at thecore, with that most important of commodi-ties—food. We used oil to replace human laboron the farm. Instead of half of Americans grow-ing food, we now have far more prisoners than

FORUM 45

Bill McKibben is the author of many books, includingThe End of Nature and, most recently, Deep Economy:The Wealth of Communities and the Durable Future.

federal and state governments, as well as forforeign governments, which at present havetrillions invested in U.S. Treasury bonds:these infrastructure securities would earn abetter rate of return at only a marginallyhigher risk, and a shift toward them would al-low the United States to pay down its debtmore productively.

Finally, funding of these infrastructureprojects would enable thousands of new pri-vate companies, whether bootstrapped by en-trepreneurs or backed by venture capital, todevelop new technologies. New, organiclight-emitting diodes that produce as muchillumination as current sources with one

tenth as much energy; ceramics that allownext-generation nuclear reactors to run safe-ly; biotech-modified microorganisms thatconvert nuclear waste into harmless materi-als; nanotech paints that reflect sunlight tomake the insides of cars cooler—the list isendless. Such new American technologieswould be in demand worldwide, exportswould boom, and within ten years the U.S.current-account deficit would reverse. Insteadof creating asset bubbles, the nation that in-vented the Internet—with the help of gov-ernment, as one must always remember—would f inally invent a New Economydeserving of that name. ❖

localize

By Bill McKibben


farmers. But farming without farmers requiresvast machinery, incredible amounts of natural-gas-based fertilizer, and a globe-spanning trans-portation system that makes sure your dinnerarrives marinated in crude oil.

If the logic of a cheap-energy world has beenrelentless globalization and specialization, thelogic of a post-oil planet points in the other di-rection: toward increasingly localizedeconomies. Let’s think about the opposite of ahuge corporate farm growing soybeans on mas-sive government subsidy to satisfy its pension-fund owners and its ADM overlords. Let’s thinkinstead about a farmers’ market. It soundsquaint, but farmers’ markets may be the fastest-growing part of the American food economy.Sales are rising by double digits every year, andthe number of such markets has doubled anddoubled again in the past decade (increasingly,even in northern climates, they stay openthrough the winter, as local farmers start grow-ing more cold-hardy crops). For the moment,some foods are more expensive at farmers’markets—noticeably meat, because we’ve got-ten rid of all the small-scale slaughterhousesaround the country. But it’s easy to imagineredirecting government subsidies away fromcorn syrup and toward sweet corn, away from500,000-head swine operations (one in Utahnow produces more sewage daily than LosAngeles) and toward mobile butchering units.

But already the food at the farmers’ market isfresher and tastes better than the stuff at the su-permarket; already it’s better for your body(which in an era of out-of-control medical costsshould count for something). And alreadythere’s a key comparative advantage that’s re-lated not to the product but to the process: thefarmers’ market is fun to visit. A couple of yearsago, a pair of sociologists followed shoppers, firstaround a supermarket and then around a farm-ers’ market. They found that at the latter, shop-pers had ten times more conversations than at

the Piggly-Wiggly. Which brings us to theother defect of the cheap-oil economy we’vebuilt: it has made us the first people on earthwho have no need of one another. Everythingwe buy comes from an anonymous distance.We eat far fewer meals with family and neigh-bors than we did fifty years ago; we have onaverage far fewer close friends. The basicpremise of the American economy—that thegoal was a bigger house farther apart from oth-er people—turns out to be mistaken, both eco-logically and psychologically.

The cold economic logic of the world nowdawning is that a relocalization must happen,one way or another: fossil fuels are becoming tooexpensive for it not to happen. But we can makethis process work much more easily. We cansubsidize small farms and rooftop solar panelsand bus systems. More fundamentally, we canmake the cost of energy reflect the damage itdoes. A strong cap on carbon would steadily andsystematically drive up the price of coal and gasand oil, and hence hasten the switch away fromthem. We’d need to do it in such a way that itwouldn’t beggar the populace—indeed, wiseminds have come up with all sorts of formulas torebate the proceeds of any such indirect taxes topoor and middle-class citizens. But in essence itwould drive us toward farmers’ markets, for eco-nomic reasons as well as for warm fellow feeling.To a large degree, this is exactly what Europeancountries did after World War II when they en-acted stiff and permanent taxes on fossil fuels. Ithelps explain why our landscapes look so differ-ent, and why Europeans perceive the quality oftheir lives to be higher even though they haveless disposable income.

The only thing we’ve asked of our economyfor a century has been growth, and it’s gotten usin a world of trouble. Now we need to demanda little durability and a little satisfaction too.We need—to spin a phrase the fantasists ofendless growth abhor—a mature economy. ❖



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