The Ethical Society of Boston

Collapse, Crisis, and Change in the U.S. Economy (Part IV)

John Miller, Economics Professor at Wheaton College and Member of the Dollars and Sense Collective addressed the Society on 14 November 2010. His address came from Collapse, Crisis, Change: Inequality, Power, and Ideology in the U.S. Economy, a book that he has just finished writing with Arthur MacEwan, a founder of Dollars & Sense and Professor of Economics at the University of Massachusetts, Boston. It will be published by May 2011. Below is Part VI in a four-part series of his remarks that described how extreme inequality and free-market ideology brought about the continuing crisis of the U.S. and global economies and how reducing inequality and combating free-market ideology would help to get the economy moving in a positive direction.

PART IV – Fixing Inequality and Elite Power and
Countering Free Market Ideology Is the Cure

The economic crisis generated significant changes in government policy. Government actions — the bailout of the banks, the economic stimulus package, and the Dodd-Frank Bill, enacted to regulate the financial industry — all involved a high degree of direct involvement in economic affairs, dropping even the façade of “leaving things to the market.” They were inadequate responses to the crisis, but they do suggest that the economic crisis of recent years has
created opportunities for extensive — perhaps more meaningful — change.

The Economic Stimulus Package

Surely the government could have done and still could do much more to stimulate demand. This is not the time to be chopping down government, but to be expanding government spending.

By our estimation, the 2009 economic stimulus package provided about half the boost needed to jump-start the economy. The $787 billion stimulus package also relied too heavily on tax reductions, which are often saved instead of spent. If more of the package had been directed to state and local governments and to direct aid for the most vulnerable,
its effect could have been larger and more rapidly achieved.

The Dodd-Frank bill enacted over the summer promised to institute new regulations that would prevent future crises in financial institutions. The Dodd-Frank bill is another small but nonetheless real change in the direction of  government regulatory policy. But while the legislation contains some useful gains, Dodd-Frank is an inadequate response to the crisis.

The most clearly positive feature of Dodd-Frank is its establishment of a consumer protection agency that may be able to restrict some of the particular abuses of borrowers that became so common in the decades leading up to and contributing to the crisis.

In other areas, however, the new legislation is either weak or virtually non-existent. The bill does set up a procedure for dealing with large financial firms that become insolvent (resolution authority) and creates a high level commission to monitor financial risk, but the effectiveness of these provisions of the bill is open to question. There are some new restraints on financial institutions trading in high-risk “derivatives.” These restraints, however, are not likely to alter substantially the operations of those institutions or to prevent the sorts of risky activities that led to the crisis. In addition, the Bill did nothing to:

• Limit the size of financial institutions — dealing with the too-big-to-fail problem.
• Change the practices of the rating agencies.
• Change the salary and bonus practices in financial firms.

But More Fundamental Changes are Possible that could go a long way toward converting the vicious cycle of  inequality, elite power, and free-market ideology into a virtuous cycle. We focus on two effective responses to the crisis:

1. Expanding social programs, especially universal social programs
2. Redeveloping the labor movement

Universal social programs — best exemplified by universal availability of child care (daycare) or a universal health care program (what has come to be called “Medicare for all” or a “single payer” system) — are good things in themselves. But these programs can also alter the structures of inequality, power and ideology that brought on the crisis. For example, providing everyone with health care through a public program has a direct and profound impact on the distribution of income by directly assuring people of this real benefit and by indirectly protecting people against the huge income losses that can accompany serious illness. Also, such a universal program tends to redistribute power in society because it provides people with options that would otherwise be lacking — for example, the option of switching jobs  without risking the loss of health care. Furthermore, a universal health program that operates largely outside of the market helps to develop the acceptance of solving problems through shared responsibility rather than through “ability to pay.”

Revitalizing the Labor Movement

Likewise, labor unions have the potential of making a major contribution to a favorable shift in income distribution, power, and ideology. The labor movement has played a major role in providing working people with direct income improvements, better social programs, and greater political power. Labor unions have also contributed to an ideology that favors collective social action, rather than a simplistic reliance on the market, as a means of social progress.  Therefore, restoring the role of labor unions is important in counteracting the forces that brought on the crisis and an important element in creating a stable and sustainable
economy.