The Squandering of America

Table of Contents



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Introduction: Failure of Politics [summary] [excerpt]

Chapter One: A Hidden Depression [summary]

Chapter Two: The Assault on the Good Society [summary]

Chapter Three: Wall Street Rules [summary]

Chapter Four: Financial Engineering and Systemic Risks [summary]

Chapter Five: The Casino Continues [summary]

Chapter Six: Budget Anxiety and Rubinomics [summary]

Chapter Seven: Equality, Efficiency, and Globalism [summary]

Chapter Eight: Trade and National Interest [summary]

Chapter Nine: The Return of Speculative Global Finance [summary]

Chapter Ten: The Squandering of Democracy [summary]

Epilogue: Redeeming America [summary]

Q&A with Robert Kuttner

1. Please explain the title of your book. What is being squandered here?

I call this the squandering of America because our country's promise is being squandered in several respects. Not only are we losing our leadership in the world, but America is an economy of broad prosperity is being wrecked, and most of the gains are going to a tiny elite. Not only is that bad for the rest of us - it risks the kind of financial collapse that we've seen in the sub-prime mortgage meltdown.

2. This book takes aim at policies that have served, over the last few decades, to dismantle regulations on capitalism. But isn't the whole point of capitalism that it's best at keeping itself in check?

Well, that's the theory of one kind of capitalism - laissez-faire. But that was pretty well discredited in the 20th century, with the great crash and the New Deal's success in saving capitalism from itself. The boom of the postwar years was a triumph of managed capitalism - not only was the system dynamic as well as stable, but the gains were broadly shared.

3. You say in this book that the egalitarianism of the New Deal era began to really come apart in the 1970s. Why then? And once that coming apart began, how did the ideology of deregulation really take root and become popular?

As I suggest in the book, it took about a generation for business elites to recover the prestige and influence that they lost in the great Depression. The managed form of capitalism also was energized by the government's success in organizing the victory in World War II. But business hated being regulated, it hated unions, and as soon as it got its usual influence back, business set about persuading both parties to deregulate.

4. You believe we're in for major financial collapse if we don't set about reversing course in terms of economic policy. The big question: WHEN? And how is that collapse going to take shape?

We got a preview in the sub-prime collapse, and I fear that the credit crunch is not over. Bankers act like speculators, they create a kind of bubble economy, and at some point it goes beyond even the ability of the Federal Reserve and the Treasury to organize bailouts. The Fed, by the way, is part of the government, and anybody who thinks that markets self corrected in the sub-prime mess is delusional. We have a brief window, in which to re-regulate excesses of financial markets, so that they don't take down the rest of the economy as they did in 1929.

5. People who read this book may be shocked by some of the predictions you make, because we aren't hearing this (a. that we're in such dire straits, b. that deregulation is playing a part) anywhere else. Why is no one talking about so much of what's in your book?

Well, I think that government officials are obligated to look on the sunny side, since so much of the value of financial assets depends on the willingness of markets to believe that assets will hold their value. The very word, credit, is from the Latin, credere, to believe. But if you read the financial pages carefully, you will see a lot of skepticism.

You take issue with analysts who say America's disparity in wealth is partly due to people irresponsibly spending beyond their means. But shouldn't people have to be responsible for themselves and their financial well-being? In terms of the current credit crunch, specifically, can't some of the blame be placed on the borrowers themselves for not reading the fine print that told them their interest rates would jump after their initial "teaser" period?

No, I would blame the banks that funded the mortgage loan sharks, and the regulators who failed to police lending standards, and the failure of the government to have a housing policy other than to turn moderate income homebuyers over to the tender mercies of predatory lenders. Millions of Americans spend more than a third of their income on rent. Real incomes are down for most people. You can't blame people for wanting a piece of the dream. These were bait-and-switch mortgages.

6. You argue that Social Security and Medicare are not the looming crises they have been purported to be. Why do you think the Bush administration and others have made them a "red-flag issue" when they're actually relatively easy to solve?

Because the Bush administration wants to privatize Social Security, and if you can persuade people that it won't be there for them, it's easier to sell privatization. But if you look at the 2007 Social Security Trustees Report, the projected shortfall is seven tenths of one percent of GDP. That's within the statistical margin of error. As for Medicare, there is a funding problem, and it will be fixed only if we address the inefficiencies of the rest of the health insurance system.

7. A section of Squandering deals with the high-risk games being played on Wall Street-hedge funds, private equity, etc.-and reveals that speculation of this nature is putting our entire economy at risk. But all (or most) of what these companies are involved in is perfectly legal. Does getting out of this trouble necessitate a dismantling of a large chunk of our financial system? Barring that unlikely outcome, what's the solution?

I think that a lot of the highly speculative activities pursued by some of the bluest chip players on Wall Street add nothing to the efficiency of the economy, and only increase risk-and make a tiny handful of traders and middlemen very rich. We need a lot more disclosure, prohibitions of conflicts of interest, taxation of windfall profits. That's hardly dismantling the entire system.

8. Alan Greenspan gets nearly universal praise for making prudent decisions as Chairman of the Fed. But you take issue with some of his actions during that era. What, specifically, do you feel he did wrong? Why do you think he was doing it?

Greenspan was the prime enabler of the bubble economy. Every time that Wall Street got into trouble from excessive speculation - in foreign currencies, in hedge funds, in third world loans, and most recently in sub-prime mortgage loans, the Fed bailed out the banks with cheap money. Greenspan should have been a tougher regulator, to head off the speculative excess before it started. But as he repeatedly testified, and repeated in his recent memoir, Greenspan is a free-market man. He thinks markets are self correcting. But ironically, his serial bailouts prove that markets require government intervention.

9. There are so many sources out there, your book included, that offer financial statistics to prove a point about the economy. But it seems that, often, one statistic can be interpreted and analyzed in multiple and conflicting ways. Do you have an advice for the layperson about how to make sure he/she is getting unbiased facts?

I'd urge people to read serious authors and analysts on both sides of the argument and make up your own mind. Actually, the news accounts in serious newspapers - The New York Times, Washington Post, the Financial Times, and the Wall Street Journal (excluding its editorials) have done a good job of analyzing both the widening income inequality and the increasing speculative risks. And with the internet, you can always go back to the source of the statistics - the Census, the Bureau of Labor Statistics, the Federal Reserve. I particularly recommend the websites of the Economic Policy Institute and the Center on Budget and Policy Priorities.

10. You have an unpopular view of globalism: that free trade, as we know it and now practice it, is bad. Why do you feel that way? (Side question: is it difficult/discouraing to be going against the tide on this issue and so many others?)

The problem is not "globalization" - we all want to buy products from all over the world and we want America to be able to export. The problem is that business elites use globalization to do end runs around the managed form of capitalism that we have had in the US since the New Deal. Business wants government to enforce property rights world wide, but it doesn't want labor standards, or environmental rules, or consumer protection. So I'm for globalization, but I want global commerce to include the same kind of social standards that we have at home. And if you look at recent votes in Congress, denying the president unilateral authority to make trade deals, insisting on labor standards in recent deals with Latin American countries, I think the tide is turning in that direction.

11. You talk about the way forward for the Democratic Party. Are its current problems ones of not being "on message" or are they deeper? And why do you think it's harmful for some politicians to be proffering a "third way" (i.e. a centrist path)?

There is a huge, latent constituency for the policies I'm advocating - a more balanced form of capitalism, with a broader distribution of opportunities and more economic security. But too many Democrats raise their campaign funds from the same sources as Republicans - on Wall Street. So Democrats take very progressive positions on social issues, which are a hard sell in some places, without taking progressive positions on pocketbook issues that could make them the overwhelming majority party. But there has been real progress on this front lately. Democrats like Sherrod Brown in Ohio and Jon Tester in Montana and Jim Webb in Virginia and Claire McCaskill in Missouri, got elected to the Senate from Republican-leaning states by running not as economic centrists but as pocketbook populists.