From Family Farm to Government Benefits to What Next?

It might be constructive if we could just, for a moment, step back from all the screaming and yelling, and look at our current fiscal situation from a historical standpoint. We got to our current social structure, with substantial governmental benefits and a substantial government budget, because of structural change in the economy. At the end of the 19th century, America's population was about 70% rural, living on the quintessential family farm. Multiple generations lived and worked together. Because the farm produced much of their basic needs, people were more self-sufficient than they are today, particularly if they diversified the crops they planted and kept a few hogs to sell for cash if needed.

The expansion of the industrial sector, particularly after the Civil War, when the robber barons consolidated entire industries under a single corporate roof or in collusive, oligopolistic arrangements, gave rise to a large worker class. These wage earners moved off the land, and into economic dependency. Their livelihoods depended entirely on the actions and abilities of remote corporate chieftains, and on the vagaries of business and financial markets cycles that were beyond the comprehension of most Americans. Astonishing exploitation of labor was commonplace in the 19th century and early 20th century, with employees paid poorly (and sometimes in company scrip rather than cash), required to work in dangerous environments, provided little or no benefits if injured on the job, and fired for any reason whatsoever. These practices reflected the harsh competitiveness of pure capitalism, and the big government we have today evolved gradually over the course of the 20th century to soften the cruelties of the unregulated marketplace. In so doing, big government made capitalism palatable for ordinary citizens.

Without a government stepping in and protecting the working class (and here we mean not only blue collar employees, but today's more numerous white collar workers, who are mostly blue collar workers with cleaner work environments), capitalism would likely not have survived in a democratic nation like America. The working class would have voted it out of existence. Indeed, Franklin Delano Roosevelt, so often lambasted as a traitor to his class, was in actuality the savior of the wealthy. His New Deal allowed the holders of capital to maintain their grip on economic power while ameliorating the distress of the less well-off. The big government, big benefits structure allowed capitalists to continue to operate with relative freedom to hire, fire, and transfer as they saw fit, thus facilitating flexibility and innovation in the U.S. economy. Although pure rapacity is largely prohibited, America's capitalists still can indulge their buccaneering urges to a greater extent than their counterparts in most other developed nations.

Then the train went of the tracks. The problem was debt. A lot of people got it into their heads that they'd be better off if they borrowed their way to a nice standard of living, instead of working for it. Max out credit cards, get a home equity loan, and presto, we're all living large. Bankers, who never more clearly demonstrated that they really are mostly from the middle of the b-school class, made this all very easy with exceptionally stupid lending standards and the dimwitted belief that real estate would never, on a nationwide basis, fall in value. Having drunk of this Kool-aid, the banks extended mountains of credit to one and all who had a pulse and a signature. Requiring borrowers to have the ability to repay was discarded as a quaint notion reminiscent of horses and buggies. Everyone forgot that no asset rises indefinitely in value and that debt eventually has to be repaid.

When illusions and reality collide, reality always wins. We're now stuck with shiploads of debt--mortgage debt, home equity debt, consumer credit, governmental debt, and commercial debt--that can't be repaid. There is enormous political and legal struggle over who should bear the burden of this bad debt. Borrowers unable to repay can't. Taxpayers are rebelling over the idea that they should bear more than they've already borne. Corporations and other business interests are trying to pull every political string, employ every legal tactic, and pressure every regulator in sight to shift their losses onto consumers and anyone who files a tax return. Things are ugly and getting uglier because the losses and other burdens must eventually be borne by someone.

One striking dysfunction is that losses no longer fall where market forces would have placed them--on creditors. Instead, losses are dumped on taxpayers via government bailouts and other government policies. You could say that combatants have been able to steer bullets and shrapnel away from themselves toward innocent bystanders. Why stop shooting if you won't take the hits? Why stop taking risks when the losses will be dumped on those who are less powerful while you collect the profits? With market forces in retreat, the specter of oligarchic plutocracy looms.

It was one thing for 20th century Presidents to ask American taxpayers to pay substantial costs in order to stabilize and improve the functioning of the capitalist system. This accommodated the dramatic structural changes industrial-scale capitalism was bringing to America and paved the way to greater prosperity for all. It's another to burden taxpayers with the costs of capitalist excess, while bailing out the financial system so Wall Streeters can resume collecting Brobdingnagian bonuses.

One episode of this sordid drama is being broadcast from Greece. Ordinary citizens are abandoning their government and taking to the streets because they have nothing left to lose. They face lower living standards if they knuckle under to the European Union's demands for fiscal austerity. With little or no stake in the EU any more, why wouldn't ordinary Greeks give their northerly neighbors a digital salute? One wacko truth is that if Greece walks away from its current debt and issues is own currency again, it will probably be able to resume borrowing soon in the international markets. Self-help bankruptcy, as it were. And if the debt contagion spreads to other countries, they may also conclude they're better off saluting as well.

The question now, as governments worldwide struggle with the problems of too much private and public debt, is what social structure will ameliorate today's problems while giving everyone a continuing stake in the system? This isn't a question of what produces the greatest economic efficiency, or the greatest short term economic growth (as measured by GDP, an increasingly meaningless figure). It's a question of what produces social equanimity. The answer matters to any nation that aspires to be a democracy. Plutocrats can't always have their way in a democracy.

The precise features of a workable system for the future aren't easily agreed upon, because everyone wants to eat their cake and have it too. Tea Partiers want tax and debt cuts, but no cuts in Social Security or Medicare. Many on the right resist cuts in defense spending, even while they propose major tax cuts. Dreamers on the left argue for more federal deficit spending, while ignoring the spectacle in Greece. There is such a thing as too much government debt, even for America, the nation that issues the world's reserve currency.

One reality is that economic growth may be modest or stagnant for quite a while. This is unavoidable because the burdens of excess debt are falling on our heads, and inhibit consumer spending. These burdens include higher unemployment, less government spending and lower government benefits, higher taxes (or revenue enhancements, or whatever euphemism becomes fashionable), and, consequently, less extravagant standards of living. It's clear, after three years of Fed money printing and federal fiscal stimulus, that there are no more magic bullets, no more bazookas.

What hope, then, is there for the future? The current political climate offers little reason to expect constructive action from the government any time soon. And Wall Street, by all indications, is determined to resume its bad old ways. The one avenue open to most Americans is to properly structure, and restructure if necessary, our own lives. Spend carefully, save plenty, avoid debt, and live well--but remember that living well doesn't mean displaying every tasteless urge to consume endless amounts of crap.

As a democracy, America is vulnerable to the irrationalities of crowds, and has taken big detours from the sensible and rational at times. At the same time, America has displayed a remarkable resilience and determination to survive and succeed, which carried it through a horrendous civil war, and a monumental world war with fascism. We will probably spend the next two or three decades fashioning the compromises needed for a new social structure. Trends toward greater inequality of income and wealth will come under scrutiny. Some economic inequality is inherent in capitalism and serves salutary purposes. But much of today's inequality doesn't come from market or commercial prowess. It comes from political influence and manipulation of regulatory processes. Such advantages are unfair in a democracy and will have to be reversed.

Until the process of reform is finished, keep a healthy balance in your emergency fund, and keep pumping part of each pay check into a retirement account. If you just take care of yourself, a lot of other problems won't seem so big.