Welcome to American, the new Japan, as we enter a new era of State Capitalism

Summary:  Today we examine an article by Robert Reich about the folly of our government’s response to the worst recession since the 1930’s.  He describes several examples showing how our government has pushed America into a system of State capitalism.  But as a fan of State capitalism, he’s blind to the result.  He imagined that State capitalism would benefit the masses.  A brilliant man, but not realistic.

The US government has taken large-scale measures to fight the global recession — as required by the crisis — but has ignored common-sense guidelines.   Since eventually we must repay this massive government borrowing, the spending should do one of two things, in general:

  1. generate a future economic return, broadly defined (e.g., investment on transportation, communication, and utilities — including things like water/sewage treatment), or
  2. minimize pain and suffering during the downturn (financial support and training of the unemployed).

Japan took another path:  twenty years of government borrowing with the proceeds lavished on politically powerful constituencies — with no thought of any the long-term gain from the spending.  Bridges to nowhere.  Large train stations in farming villages (imagine Grand Central built at Petticoat Junction).  Now only the debt remains, a crushing burden for future generations.

Despite the warning from Japan’s experience, we have done the same.  Reich sees this, but fails to see this as the inevitable result of State Capitalism.  That is a system combining capitalism and control by the State.  In practice, it means control of both sectors of the nation by governing elites.

Reich believes in elite-driven government serving the public’s benefit, seeing people like himself as the elite.  He seldom (if ever) speaks about mobilizing citizen involvement (except in the sense the Pharaohs did).   It’s a dream.  Government spending with little citizen involvement will benefits only the political powerful.  Japan generously ruined their nation to provide an example.   We might do the same.

Today’s reading

Excerpt from “Why the Dow is Hitting 10,000 Even When Consumers Can’t Buy And Business Cries ‘Socialism’“, Robert Reich, at his blog, 22 September 2009 — Please, no comments about the stock market.  They are off-topic on this website and will be deleted.

… how can the Dow be so far up when every business and Wall Street executive I come across tells me government is crushing the economy with its huge deficits, and its supposed “takeover” of health care, autos, housing, energy, and finance? Their anguished cries of “socialism” are almost drowning out all their cheering over the surging Dow.  The explanation is simple.

The great consumer retreat from the market is being offset by government’s advance into the market. Consumer debt is way down from its peak in 2006; government debt is way up. Consumer spending is down, government spending is up. Why have new housing starts begun? Because the Fed is buying up Fannie and Freddie’s paper, and government-owned Fannie and Freddie are now just about the only mortgage games remaining in play.

Why are health care stocks booming? Because the government is about to expand coverage to tens of millions more Americans, and the White House has assured Big Pharma and health insurers that their profits will soar. Why are auto sales up? Because the cash-for-clunkers program has been subsidizing new car sales. Why is the financial sector surging? Because the Fed is keeping interest rates near zero, and the rest of the government is still guaranteeing any bank too big to fail will be bailed out. Why are federal contractors doing so well? Because the stimulus has kicked in.

In other words, the Dow is up despite the biggest consumer retreat from the market since the Great Depression because of the very thing so many executives are complaining about, which is government’s expansion. And regardless of what you call it – Keynesianism, socialism, or just pragmatism – it’s doing wonders for business, especially big business and Wall Street. Consumer spending is falling back to 60 to 65 percent of the economy, as government spending expands to fill the gap.

The problem is, our newly expanded government isn’t doing much for average working Americans who continue to lose their jobs and whose belts continue to tighten, and who are getting almost nothing out of the rising Dow because they own few if any shares of stock. Despite the happy Dow and notwithstanding the upbeat corporate earnings, most corporations are still shedding workers and slashing payrolls. And the big banks still aren’t lending to Main Street.

Trickle-down economics didn’t work when the supply-siders were in charge. And it’s not working now, at a time when — despite all their cries of “socialism” — big business and Wall Street are more politically potent than ever.

About Robert Reich

Robert Bernard Reich (born 1946) is an American politician, academic, writer, and political commentator. He served from 1993 to 1997 as the Secretary of Labor under President Bill Clinton.  Reich is a former professor at Harvard and Brandeis. He is currently Professor of Public Policy at the Goldman School of Public Policy at the University of California, Berkeley. 

Source:  Wikipedia.

Afterword

Please share your comments by posting below.  Per the FM site’s Comment Policy, please make them brief (250 word max), civil and relevant to this post.  Or email me at fabmaximus at hotmail dot com (note the spam-protected spelling). 

For more information from the FM site

To read other articles about these things, see the following:

Reference pages about other topics appear on the right side menu bar, including About the FM website page.

Some posts about solutions to the financial crisis:

  1. A happy ending to the current economic recession, 12 February 2008 – The political actions which might end this downturn, and their long-term implications.
  2. Slow steps to nationalizing the US financial sector, 7 April 2008 — How this will change our society.
  3. How should we respond to the crisis?, 24 September 2008
  4. A solution to our financial crisis, 25 September 2008
  5. The last opportunity for effective action before disaster strikes, 3 October 2008
  6. Effective treatment for this crisis will come with “The Master Settlement of 2009″, 5 October 2008
  7. Dr. Bush, stabilize the economy – stat!, 7 October 2008
  8. The new President will need new solutions for the economic crisis, 9 October 2008
  9. New recommendations to solve our financial crisis (and I admit that I was wrong), 23 October 2008
  10. Everything you need to know about government stimulus programs (read this – it’s about your money), 30 January 2009
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5 thoughts on “Welcome to American, the new Japan, as we enter a new era of State Capitalism

  1. The Dow is up to 10,000 even though the U.S. economy is tanking because American multinational corporations (which account for the Dow Jones Index) have detached themselves from the United States economy.

    Health care stocks are booming because the health care companies have bribed congress into drafting a law that forces all Americans to buy fabulously expensive private insurance with no effective cost controls.

    If Robert Reich isn’t aware of these basic facts, he doesn’t bother to read the news or watch TV or surf the internet.

    What evidence shows that Robert Reich is “brilliant”? I have seen none. Many public figures are described as “brilliant,” yet they seem unaware of basic facts of contemporary life (such as Obama’s unawareness that he is repeating the follies and hallucinations of Viet Nam), basic facts of recent history (the Soviets sent vastly more troops and tanks and helicopter gunships and artillery into Afghanistan than we have, and the Soviets lost badly), and basic common sense (viz., if you keep repeating policies that failed in the past, you will get the same failed results as before).

    Where is the “brilliance” in any of that? Why are these people described as “brilliant”? What evidence shows that the vast majority of influential and prestigious people are anything other than grossly incompetent and shockingly ignorant fools?
    .
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    Fabius Maximus replies: Reich makes the exact same you do (albeit in a less inflamatory way). So saying “if Reich isn’t aware” suggests that you did not read his article. That’s not brilliant.

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  2. Joking aside, I think it has more to do with this, from Keynes’ “The General Theory of Employment, Interest, and Money“:

    “Thus the professional investor is forced to concern himself with the anticipation of impending changes, in the news or in the atmosphere, of the kind by which experience shows that the mass psychology of the market is most influenced. This is the inevitable result of investment markets organised with a view to so-called “liquidity”. Of the maxims of orthodox finance none, surely, is more anti-social than the fetish of liquidity, the doctrine that it is a positive virtue on the part of investment institutions to concentrate their resources upon the holding of “liquid” securities. It forgets that there is no such thing as liquidity of investment for the community as a whole. The social object of skilled investment should be to defeat the dark forces of time and ignorance which envelop our future. The actual, private object of the most skilled investment to-day is “to beat the gun”, as the Americans so well express it, to outwit the crowd, and to pass the bad, or depreciating, half-crown to the other fellow.

    This battle of wits to anticipate the basis of conventional valuation a few months hence, rather than the prospective yield of an investment over a long term of years, does not even require gulls amongst the public to feed the maws of the professional; — it can be played by professionals amongst themselves. Nor is it necessary that anyone should keep his simple faith in the conventional basis of valuation having any genuine long-term validity. For it is, so to speak, a game of Snap, of Old Maid, of Musical Chairs — a pastime in which he is victor who says Snap neither too soon nor too late, who passes the Old Maid to his neighbour before the game is over, who secures a chair for himself when the music stops. These games can be played with zest and enjoyment, though all the players know that it is the Old Maid which is circulating, or that when the music stops some of the players will find themselves unseated.”

    I doubt the retail “Hoi Polloi” investors are back with a vengeance.

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  3. As an illustration of what I mean, I recently have become interested in the picaresque novel

    The picaresque novel (Spanish: “picaresca”, from “pícaro”, for “rogue” or “rascal”) is a popular sub-genre of prose fiction which is usually satirical and depicts in realistic and often humorous detail the adventures of a roguish hero of low social class who lives by his or her wits in a corrupt society. As indicated by its name, this style of novel originated in Spain, where it was possibly influenced by Arabic literature (specifically the maqama genre, which also featured the episodic exploits of a rogue character), flourished in Europe in the seventeenth and eighteenth centuries, and continues to influence modern literature.

    This is part of my broader interest in 17th century Spain. (Note, however, that is wikipedia article cites many modern novels that may or may not be helpful, from my vantage point. )

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  4. Reminds me of what Codevilla calls “government by Stakeholders” in this article: “From Citizens to “‘Stakeholders’: The New American Constitution“, Angelo M. Codevilla, American Spectator, September 2009.

    He compares it to similar regimes in Italy, Mexico, EU, and Argentina. He seems to lament the replacement of legislators by stakeholders, but weren’t the legislators themselves virtually owned by the stakehokders, through campaign money. I guess the difference is, you could still, possibly, hold a legislator accountable at the polls, but the stakeholders countered that by buying BOTH candidates. Now it seems they have found a way to work through the executive and his “czar” more efficiently than through the unwieldy congress.

    FM Note: Interesting article! Here’s the opening:

    Ever since {Obama} became president the media have carried accounts of him and his closest officials meeting with “everybody,” meaning executives of banks, auto makers, insurance companies, medical suppliers, energy producers, indeed of major corporations in each sector of American life. They meet for no less a purpose than to mandate new ways for Americans to go to the doctor; to change the kinds of cars we drive, the kinds of places we live, and the work we do; to decide how much we should pay for electricity; and many more things. Corporations that had grown by providing their customers ever more attractive choices now negotiate with the U.S. government and each other about how collectively to structure (read, restrict) their customers’ choices in ways that will suit the government while guaranteeing their profits. To object that there is nothing in our Constitution that empowers the government to make deals with some private citizens at the expense of other private citizens or otherwise to shape citizens’ lives involuntarily is to have failed to notice that a new constitution has largely superseded the one ratified in 1789.

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