America Says Goodbye to Pure Capitalism

The United States as keeper of the Holy Grail of capitalism – those times appear to have disappeared. In an emergency, the basic tenets of capitalism are jettisoned. Nationalization, regulatory madness, more and more billions freely handed out: the strong state is on the march in the USA.

General Motors CEO Rick Waggoner traveled from Detroit to Washington on Friday. On Capitol Hill, he asked Senators for “access to federal money”. In a packed chamber in the Dirksen Senate Office Building, he quickly got approving nods of assent.

The reaction was almost inevitable. The Senator for whom the building was named once said, “A billion here, a billion there, and pretty soon we’re talking real money.” Except that these days single digit numbers in the billions are scarcely ever heard of whenever new spending programs are debated. Now they talk about figures in the tens and even hundreds of billions of dollars.

The major car manufacturers in Detroit want $50 billion in the form of low-interest government loans. A package of energy subsidies last year cost $80 billion and ethanol subsidies alone will currently cost $10 billion a year. The economic package submitted in the spring came in at $150 billion and a second one favored by Barack Obama would add another $50 billion. And the newly launched bailout of Fannie Mae and Freddie Mac may end up swallowing $200 billion taxpayer dollars. “The era of big government is back and it’s bigger than ever,” the Wall Street Journal proclaimed.

“Government isn’t the solution, it’s the problem,” was Ronald Reagan’s campaign slogan in 1980 and it has since become the hallmark of American economic policy. Cut taxes, deregulate markets, privatize companies – market forces can control everything. One still hears the rhetoric, notably in Republican John McCain’s campaign speeches, but the reality is very much different.

Of course, pure capitalism never really existed in the United States. Professional sports like baseball and basketball are riddled with complicated redistribution schemes for franchises that would be branded as socialistic if they were tried in continental Europe. Economic “islands” were also retained. The United States Postal Service is still run by the government, no modifications allowed. The closure of a single rural post office can become a political issue in a far-away state capital, something that already happened in the case of Walpole, Maine, population 400.

And under stressful conditions, certain basic rules have historically been regularly tossed overboard. In the early 1970s, the government rescued the defense contractor Lockheed-Martin and a few years later it sprang to automobile manufacturer Chrysler’s assistance. At the end of the 1980s, the government bailed out the savings and loan industry, preventing hundreds of banks from going under. The bill to the taxpayer for that was almost $125 billion. Now, everything has recently taken on a new characteristic. Whether the problems are large or small, overreaction in economic and financial policy has become the order of the day. After the Enron scandal five years ago, the brutal Sarbanes-Oxley Act was pushed through the legislative process in just a few weeks. It became rapidly apparent, however, that the act amounted to over-regulation; many foreign businesses panicked and gave up their stock exchange listings with Wall Street. New York as a financial center lost ground to the City of London.

Now economist Nouriel Roubini complains that Fannie and Freddie’s de-facto nationalization is “the largest nationalization in the history of mankind”. U.S. Secretary of the Treasury Hank Paulson, Roubini wrote, has pulled off the “most radical change in global economics in a decade”. He added, “Welcome to the United Socialist States of America.”

Bush has surrendered

The excitement caused by Fannie and Freddie nearly obscured another announcement by the Bush administration: Washington wanted to buy up teetering mortgage derivatives in order to stabilize the market. In view of the ever-expanding real estate and financial crisis, it’s a reasonable undertaking at first glance. Except that they intended to use the same thing to justify governmental buying of entire companies just because they were ailing.

The Bushists appeared with completely different aspirations. Starving the beast: that was the declared goal of many Bush supporters when they came to power nearly eight years ago. By cutting taxes, they wanted to cut revenues and thereby prevent government from having much money to distribute and redistribute.

The strategy didn’t work. Taxes went down but expenditures rose. At the end of this year, expenditures by government agencies will have risen by eight percent; next year that’s expected to increase by another seven percent.

Increased expenditures for domestic and foreign security since 9/11 are by no means the cause of the increase. Investment in infrastructure hasn’t grown significantly as one would have expected after hurricane Katrina in 2005 and the spectacular bridge collapse in Minneapolis a year ago. “The welfare-industrial complex was coddled,” said David Boaz, Executive Vice President of the Cato Institute, a Libertarian Washington think-tank. “Instead of building roads, bridges and dams, they sponsored midnight basketball leagues.”

That’s not sustainable. Today’s actions were bought at the cost of sacrificing any future ability to act. Experts calculate the Goldman Sachs bailout will end up costing the American government $5.3 billion over the next ten years.

In the longer term, the future looks even gloomier. “Ten years ago, long-range prospects looked terrible,” said Laurence Kotlikoff, a financial researcher at Boston University. “Since then, things have drastically deteriorated.” Especially when the bill for the expansion of health benefits for seniors adopted during the presidential campaign in 2004 comes due.

Kotlikoff, who first introduced so-called “generational accounting” years ago, calculates that the cash value of promised benefits to seniors and others has already exceeded expected income by $70 billion.

The solution would be more government – a lot more government – because in order to close the gap, social security payments would have to double immediately and remain permanent, says Kotlikoff. That, of course, is about as achievable as it is desirable.

“Basically, the country is bankrupt,” concludes Kotlikoff. In the end, the government will have no alternative other than a massive devaluation of the dollar in order to make the debt more affordable.

“The only remarkable thing,” says Kotlikoff, “is that there are even any foreign investors still willing to buy American securities.”