Michael Lind

In the case of today’s economic emergency, the first doctor is the equivalent of those who treat the credit crisis caused by subprime mortgages as the problem, rather than as a symptom of an underlying disorder. According to this diagnosis, lax regulation is responsible for turning the U.S. housing bubble into the greatest global economic collapse since the Depression of the 1930s. Liberals tend to blame the panic on the deregulation of the financial system under Clinton and George W. Bush and a refusal by regulators to enforce the regulations that remained. Conservatives and libertarians tend to emphasize the culpability of Congress and both Clinton and Bush in trying to expand homeownership for the un-credit-worthy, particularly low-income members of minority groups. Both sides condemn regulators who allowed banks and other financial institutions to leverage their assets at a ratio of 30 or 40 to 1. On the basis of this diagnosis, the cure for a crisis caused by inadequate regulation and enforcement is new regulations and tougher enforcement.

All that is fine as far as it goes, says Economy Doctor No. 2. But it does not go far enough. It does not address the patient’s underlying problem (the patient’s “pneumonia”). It neglects the connection between the financial crisis and global trade imbalances, and how those imbalances were created by American binging and Asian abstemiousness.

Global trade imbalances? Yes, global trade imbalances. Before you conclude that the second Economy Doctor is a quack with an M.D. from a fly-by-night school in the Caribbean, consider the argument.

According to analysts as diverse as Federal Reserve Chairman Ben Bernanke, Financial Times columnist Martin Wolf, New York Times columnist Paul Krugman, and analysts Sherle Schwenninger and Michael Pettis, the bubble economy of the past generation resulted from the toxic interaction of Asian oversaving and American overborrowing. Since the 1970s, the U.S. has run a chronic trade deficit with Asian export economies, of which the most important have been Japan and China. As Americans splurged on Japanese and more recently Chinese imports, dollars flowed out of the U.S. In a world of falling exchange rates, the result should have been the appreciation of the currencies of Japan and China and the decline of the dollar. Result: Japanese and Chinese imports would have become more expensive for the U.S. consumer, while American exports would have become cheaper for Asian consumers. In a world of floating exchange rates, Asian-U.S. trade would have returned to something like balance, and U.S. interest rates would have been higher, popping the housing bubble at an early stage of inflation.

But this didn’t happen. To protect their export industries from becoming less competitive as a result of an increase in their currencies relative to the dollar, Japan and China bought dollar-denominated assets, most notably U.S. Treasury bonds. This in turn lowered interest rates in the U.S., making it easy for affluent speculators and strapped consumers alike to go on a credit-fueled real-estate purchasing spree that came to an end only last September. China and Japan also depressed domestic consumption and wages in order to steer more investment into export-oriented manufacturing.

According to the second diagnosis, then, the underlying cause of the crisis was what Ben Bernanke described as a global savings glut. American consumers could have tried to go on a borrowing spree, but they would not have gotten very far but for low interest rates. The Federal Reserve might have wanted to lower interest rates, but might not have had as much success unless it had found Asian governments flush with excess savings that were willing to buy U.S. debt, as part of currency manipulation strategies designed to help their export industries. The point is not to “bash China” nor to excuse debt-intoxicated Americans living champagne lives on beer budgets. The point, rather, is that when you have a drug habit, it’s easier to satisfy it when the pusher is lending you the money.

Enter the last of our physicians, Doctor 3. Yes, she says, the regulatory system was broken — and yes, the underlying problem was the global savings glut and the interaction of Asian mercantilism with American consumerism. But, says the third doctor, there is an underlying problem underlying the underlying problem of unbalanced global trade (try saying that three times). The bubble-blowing system of unbalanced trade never would have arisen in the first place, had employers on both sides of the Pacific shared more of the gains from productivity growth with their workers.

This third diagnosis is held by structural Keynesians, or post-Keynesians, a broad school that includes Robert Reich, Thomas Palley and James K. Galbraith, among others (who might or might not agree with my description). Structural Keynesianism has affinities with the “underconsumptionist” tradition of economic thought, a tradition that includes 19th-century thinkers like Malthus and Sismondi and New Deal Democrats like Rexford Tugwell. The underconsumptionist tradition holds that capitalism is inherently unstable, with chronic tendencies to overproduction, underconsumption and recession- or depression-inducing gluts of commodities or manufactured goods.

The basic idea is simple: Rich people have a lower propensity to consume (the term was coined by Keynes) than middle-class and low-income people. It follows that if the gains from productivity growth go to workers, they are more likely to spend the money, stimulating further investment and further growth. But if the gains from productivity growth disproportionately go to the rich, they are less likely to spend the money on mass-produced goods and services than they are to save the money or use it to speculate in assets. The result? Either the economy chokes (too much savings) or explodes (asset bubbles). The underconsumptionist theory is the opposite of trickle-down economics. If it is right, then shifting shares of national income from the majority to the rich minority, far from leading to investment and growth, is likely to lead to speculation and bubbles.

While they hold obvious appeal for liberals and populists, underconsumptionist theories have generally had a disreputable odor of crankiness, particularly in the last generation, when many Democrats as well as Republicans shared a belief in the efficiency and self-correcting nature of free markets. But the underconsumptionists can point to the striking parallels between the 1920s and the crash that followed and the 1990s/2000s and the crash that followed. In both the 1920s and 1990s/2000s productivity both in the U.S. and the world as a whole surged while wages stagnated in an anti-union political climate. In both periods the rich used their increased share of income in part to engage in heroic speculation in assets — the stock market and Florida real estate in the 1920s, and in recent years … well, the stock market and Florida real estate. Meanwhile, in both eras middle-class and working-class consumers seeing few or no wage gains turned to debt to finance their consumption, while many of the rich went on their own borrowing and spending sprees, until defaults in one part of the system triggered cascading national and global collapses.

Like the diagnosis of the third doctor in my original example, the diagnosis of Economy Doctor 3 includes, but is not limited to, the diagnoses of the other two physicians. Yes, there is a need for sound regulation — but that is not sufficient, without a rebalancing of the global economy — and rebalancing is not enough, unless both American and Chinese workers share more of the gains from growth in their paychecks. In particular, underconsumption in China and other East Asian economies is a global problem not just a domestic one. Americans with higher wages will have less of a need to borrow in order to consume, which is just as well, because if Chinese wages and consumption rise, there will be less excess savings in the system to enable low interest rates for borrowers in the U.S.

These, then, are the three diagnoses of the present crisis: It is caused only by poor regulation; it is caused directly by poor regulation and ultimately by global trade imbalances; it is caused indirectly by poor regulation, proximately by global trade imbalances, and ultimately by the maldistribution of the gains from economic growth among employers and workers in major industrial countries.

The good news is that we have sorted out the three diagnoses. The bad news is that most of the industrial nations, and half of the American political class (the right) is listening only to Doctor No. 1.

The consensus among Republicans and perhaps some “conservaDems” is that the crisis arose from bad regulation, particularly from pressures on Fannie Mae and Freddie Mac to lend money to bad credit risks among low-income Americans. End of story. No need to reconsider trade policy, and certainly no need to think about the distribution of income in the U.S. or elsewhere.

For once, the Europeans and Asians agree with America’s Republican Party. The European consensus seems to be that foreigners are the innocent victims of bad American regulatory policies. The emphasis of the major European nations, particularly Germany and France, at the recent G-20 meeting, was entirely on new international and national regulations of finance.

For its part, the government of America’s codependent China has tended to treat any discussion of its currency strategy and the priority it gives to export industries over domestic consumption as attempts by irresponsible Americans to make China the scapegoat for the lack of thrift on the part of American consumers. (Never mind that China’s export-oriented growth has depended on a lack of thrift on the part of American consumers.) And while discussion of unbalanced patterns in trade as contributing factors in the bubble economy is considered controversial in Europe and Asia, the discussion of the roots of those imbalances in domestic patterns of income distribution is completely off the agenda.

The second and third diagnoses have been ignored by most industrial nations in Europe and Asia. We had better hope that the first physician is right: the world economy’s sore throat is nothing more than a sore throat and aspirin in the form of more financial regulation will be sufficient as a cure. Otherwise the patient is in serious trouble.

In fact industrial policy is as American as domestically produced apple pie.  George Washington supported Alexander Hamilton’s plan for promoting American manufacturing by means of subsidies and tariffs, and Hamilton’s opponents Thomas Jefferson and James Madison eventually reconciled themselves to federal support for American manufacturing.  Henry Clay proposed a similar “American system” of infant-industry protection and federal support for infrastructure.  During the Civil War, Clay’s disciple Abraham Lincoln presided over the enactment of a version of the American System, based on high tariffs to protect strategic industries and federal land grants and financial subsidies for transcontinental railroads.

Industrial policy was even more successful in the 20th century U.S.  After the Wright brothers invented the airplane, the federal government used airmail to subsidize the infant American civil aviation industry.  The U.S. Navy worked with American companies to create the Radio Corporation of America (RCA), which spun off the NBC and ABC radio and TV networks.  During World War II the government built vast numbers of factories, which were turned over at low prices to private companies after 1945.

The most innovative entrepreneur in the 20th century was the U.S. government.  The federal government invented or developed nuclear energy, computers, the Internet and the jet engine.  And it built the interstate highway system and completed the national electric grid, creating a continental market based on the technologies of the second industrial revolution.

To be sure, the government has sometimes backed failures, usually in the fad-driven energy field, like Solyndra or synfuels back during the Carter years.  But few private venture capitalists can match the remarkable record of success of Uncle Sam.  Indeed, venture capitalists in IT and social networking have exploited and commercialized technologies from the transistor to the Internet that were originally developed by America’s home-grown version of state capitalism.

Even a seemingly commonsensical rule like preventing the government from “picking winners” among particular corporations is unconvincing, in light of the historical record.  Congress gave Samuel F.B. Morse the money he needed to develop his telegraph.  Was that wrong?

It would be easy to get a thousand Ph.D. economists to sign a manifesto insisting that we should ignore history whenever it conflicts with theory. But those who know only about generic firms competing in abstract markets know nothing useful at all.  Nobody can understand real-world industrial capitalism without understanding the nature and history of the specific major industries that rival countries struggle to obtain, by fair means or foul.

Shipbuilding, for example. In the 17th century, in order to surpass the Dutch as the leading trading and naval power, the English passed the Navigation Acts, which mandated that all goods brought in and out of the island kingdom had to be borne in English ships with English crews. The modern equivalent would be a requirement that nobody could fly in or out of the U.S. except on an American airliner made in America by Boeing.

The Navigation Acts ensured that Britain would have an immense, state-of-the-art merchant marine (civilian) fleet with experienced sailors, so that both ships and men could be drafted in wartime.  For this reason, Adam Smith wrote in “The Wealth of Nations”:  “As defence, however, is of much more importance than opulence, the act of navigation is, perhaps, the wisest of all commercial regulations of England.” Elsewhere in the book Smith explained:  “The defence of Great Britain depends very much upon the number of its sailors and shipping.  The act of navigation, therefore, very properly endeavors to give the sailors and shipping of Great Britain the monopoly of the trade of their own country.”

When the United States won its independence from Britain, it followed the  example of the mother country and passed its own navigation laws.  While foreign ships were permitted to carry goods to and from U.S. ports, all “cabotage” — port-to-port shipping along the coasts or up and down rivers — was a monopoly of ships that had 75 percent American ownership and majority-American crews.  Until World War I, America’s merchant marine fleet was protected under the 1817 Act Concerning the Navigation of the United States.  This policy was reaffirmed by the 1920 Jones Act, which remains in place today.

The Jones Act and its predecessors, however, did nothing to help builders of ocean-going commercial ships.  During World War I, the federal government paid for a massive expansion of American shipbuilding.  But the war left a global glut and American shipbuilding contracted again.

President Franklin Roosevelt had served as assistant secretary of the Navy in Woodrow Wilson’s administration.  Under his leadership, Congress in 1936 passed the Merchant Marine Act and created the U.S. Maritime Commission to promote “an adequate and well-balanced American merchant marine, to promote the commerce of the United States, and to aid in the national defense.”

In World War II, as in the earlier global conflict, defense dollars paid for the expansion of American shipyards.  When overcapacity plagued the global industry after the war, the major shipbuilding nations responded by subsidizing their shipbuilders to preserve them and compete for shares of the global market.  The U.S. responded in kind, providing American shipbuilders with operating differential subsidies to compensate for foreign government subsidies and lower wages overseas.

Then Ronald Reagan was elected president.  In 1981 the market fundamentalists of the Reagan administration brought about the merger of the U.S. Maritime Commission with the U.S. Department of Transportation, not with the Pentagon, where according to Adam Smith’s logic it belonged.  The administration and Congress abolished all subsidies to American shipbuilders, leaving them unable to compete for global business against foreign rivals that benefited from government subsidies, government financing of sales, government R&D, government grants and tax benefits. The Reagan administration claimed that the planned 600-ship navy would compensate for the loss of commercial business by American shipyards, but that navy never materialized, and following the Cold War the U.S. Navy shrank.  A five-point national shipbuilding initiative by the Clinton administration, designed for military-to-commercial conversion, was too little and too late.

Shipbuilding is a highly capital-intensive, advanced technological industry, not an “old,” labor-intensive industry that is naturally suited to poor, developing nations with unskilled labor.  In addition to high-wage Japan and South Korea, leading shipbuilding nations include Germany, France, Finland, Italy, Poland and Spain, which unlike the U.S. have never ceased to protect and subsidize this critical strategic industry.  Unions cannot be blamed for the demise of American shipbuilding, because many successful shipbuilding work forces abroad are unionized.

In Reagan’s first year in office, 46 merchant ships were on order from American shipbuilders.  During his final year in office, the number was zero.  After Reagan, American shipyards that built civilian seagoing vessels collapsed from nearly two dozen to around half a dozen, which depended on dwindling Navy contracts and the Jones Act for most of their shrinking business.

In 1975, Japan, South Korea and China had 8 percent of world shipbuilding.  By 2010 the three East Asian nations had 86 percent of global shipbuilding. Even though U.S. exports and imports account for a fifth of all seaborne trade, the U.S. builds fewer than 1 percent of the commercial ships in the world.  No clearer proof exists that nations can use industrial policies to start from practically nothing and soon dominate a major global industry.  Having learned that lesson, India and Brazil have announced plans to promote their national shipbuilding industries, using methods like procurement from state-owned energy companies and national content laws. Meanwhile, the U.S. has no plans to rebuild the once-great American shipbuilding industry that Franklin Roosevelt expanded and Ronald Reagan allowed to collapse.

Government policy, not absolute or comparative advantage, explains why the U.S. and the European Union dominate the global aircraft construction industry, why Japan captured much of the global consumer electronics market, and why China has rapidly become a manufacturing power.  None of this means that the U.S. should go back to high 19th-century-style tariffs or emulate East Asian countries in suppressing wages and consumption to overinvest in manufacturing.  Nor does it justify corrupt crony capitalism that tries to clothe itself in the rhetoric of the national interest.  But it does mean that today, as in the past, a national industrial policy of some kind is as essential as the armed forces to American security and prosperity.

One way or another, America will have an industrial policy.  The only question is whether it will be made by us — or made for us, by foreign governments in the service of interests other than our own.

How can otherwise sane people believe such lunacy?  The answer is that members of the right-wing counterculture are brainwashed — that is the only appropriate term — by  the apocalyptic propaganda ground out constantly by the conservative media establishment. A perfect example is a recent essay by Philip Klein, a senior editorial writer of the Washington Examiner, the right-wing newspaper owned by the billionaire Philip Anshutz:  “The Welfare State Is Destroying America.”

Klein begins, typically, with the fall from grace of America under the sinister Franklin Roosevelt, who presided over the establishment of Social Security: “But Roosevelt was dead wrong that the program would help the nation avoid deep debt.  Social Security and the entitlement programs that followed its legacy of seeking to protect citizens from the ‘hazards and vicissitudes of life,’ turned out to be fiscal disasters.”

In the real world, of course, today’s national debt has nothing to do with Social Security, whose trust fund has a surplus that will last for decades, with the precise date of the trust fund’s exhaustion depending on the rate of general economic growth. True, the federal government has to raise the tax revenue to repay the money it borrowed from the trust fund — but then, the federal government has to repay all of its creditors, domestic and foreign.  What’s wrong with that?

As if to concede that there is no Social Security crisis in the near future, Klein engages in three intellectually dishonest maneuvers typical of right-wing propagandists. First, he talks about medium-term and long-term problems as though they were present-day emergencies. Second, he blurs the distinction between Social Security’s long-term fiscal challenges, which are minor, and those caused by rising healthcare costs, in order to make Social Security seem worse off than it is in reality. Third, he implies that “the growing debt burden” of the United States is primarily caused by Social Security, Medicare and Medicaid, ignoring tax cuts, wars and the effects of a near-depression:

With health care costs rising and the population aging, America’s welfare-state obligations are bringing the country to its financial knees. If left unchecked, the growing debt burden will not only trigger runaway inflation and stifling taxes, but it will also threaten national security.

By now readers of the Washington Examiner must assume that Franklin Roosevelt and Lyndon Johnson deliberately designed Social Security, Medicare and Medicaid to be paid for by federal borrowing.  Why shouldn’t Klein’s audience leap to that false conclusion?  After all, Klein has not mentioned the funding streams that pay for these programs:  payroll taxes (Social Security), payroll taxes and general revenues (Medicare) and general revenues (Medicaid).

If Klein were honest with his readers, he would point out that the main causes of federal deficits in the last generation have been the Reagan and Bush tax cuts, plus the fiscal aftereffects of the Great Recession, in the form of falling tax revenues and increased spending on unemployment insurance and stimulus programs.  But that would distract from the false impression that Klein is seeking to convey.

So far in this classic of polemical literature, “The Welfare State Is Destroying America,” Philip Klein has relied solely on rhetoric.  In the next few paragraphs he uses a few numbers, all of which have been cherry-picked to paint a picture of imminent national economic collapse, and all of which are misleading.

Here is misleading argument No. 1:

Spending on Social Security, Medicare, Medicaid and Obamacare alone currently account for 46 percent — or nearly half of — federal spending, excluding interest payments. Over the next 25 years, that percentage will explode to 66 percent, or close to two-thirds, according to the Congressional Budget Office.

Ooh, scary!  These numbers may frighten readers, but they are meaningless. The only number that conceivably would matter would be the overall federal-state-local spending as a share of GDP, which in the U.S. is well below the average for industrial democracies that are just as competitive and prosperous. Saying that the share of federal spending that is devoted to Social Security and healthcare spending will grow over 25 years from 46 to 66 percent does not support Klein’s case that the welfare state will “destroy” America. These are just irrelevant numbers, thrown out to impress the ignorant reader of the Washington Examiner.

Misleading argument No. 2 follows:

Numbers associated with the nation’s debt crisis are almost too staggering to comprehend. Last month, total U.S. debt surpassed $15 trillion. But a recent analysis by Boston University economics professor Laurence Kotlikoff found that when long-term entitlement obligations are considered, the true fiscal gap is $211 trillion.

What Klein fails to point out is that Kotlikoff’s calculation for unfunded entitlement obligations is for the period between now and infinity. Even if Kotlikoff and Klein used the briefer time span of, say, 2012-2100, there would be no cause for alarm, because nobody is going to present the federal government with a check for advance payment of all projected entitlement payments in the remainder of the 21st century, due tomorrow.  In other words, saying the U.S. has a “fiscal gap” is like saying that you are in danger of bankruptcy from a “personal fiscal gap,” because you could not pay off the entire house or car mortgage today. As long as you can make the installment payments at a reasonable interest rate, you, like the nation, are fine.

The abstract “fiscal gap” arises almost entirely from the minor projected shortfall of payroll tax funding for Social Security and, more important, from the estimated out-of-control growth of healthcare costs in decades to come.  Change the variables, by means of new taxes for Social Security, benefit cuts or control of excessive costs in the U.S. medical industry, and the Big Scary Fiscal Gap disappears or shrinks dramatically, depriving right-wing hacks and left-wing deficit hawks of a club used to beat Social Security and Medicare.

Does Klein tell his readers this? Of course not.  He’s just throwing out scary-sounding statistics to stampede the yahoos.

On to misleading argument No. 3:

Greece, with an economy 1/50th the size of the U.S., is threatening the economic standing of the rest of Europe because of its growing debt burden, which hit 143 percent of its gross domestic product in 2010.

The U.S. is on pace to match that dubious distinction in under 20 years, according to the CBO, and to soar to 716 percent by 2080. Sustaining such debt would require raising marginal tax rates to as high as 88 percent, the CBO has told The Washington Examiner.

Shame on the CBO for misleading the public in this way. The experts of the CBO know perfectly well that the United States is never going to have a national debt of 716 percent of GDP or marginal tax rates of 88 percent.  Long before anything like these absurd numbers were reached, policies would be changed to cut costs in medical spending. Long-term projections like these are just scary stories told to frighten the public into fiscal sobriety, in the same spirit that a parent would tell an overweight child that if she or he kept eating, then according to a straight-line computer projection, by the age of 40 she or he would weigh 23 tons.

As it happens, the CBO’s own rigorous work undercuts the apocalyptic narrative set forth by conservatives like Philip Klein.  Here, from a CBO report of a few years back (the long-term projections have not significantly changed),  is Box 2, “The Effect of the Aging of the Population on Spending on Medicare and Medicaid.”

This one graph disproves practically everything American conservatives say about the alleged unaffordability of entitlements. Note that the aging of the American population alone would only raise the share of GDP spent on Medicare and Medicaid slightly between now and 2082.  The projected increase is almost entirely the result of excess cost growth in America’s dysfunctional medical-industrial sector and has next to nothing to do with aging. Now look at Figure 4, “Projected Spending on Health Care as a Percentage of Gross Domestic Product.”

Observe that the cancerous growth of healthcare costs occurs chiefly in private sector healthcare spending — not in Medicare and Medicaid.  In other words, the cost problem is one of the entire U.S. medical industry, private and public alike.  It is not a problem caused by “entitlements.”

Debating the solutions would take us too far from the subject, although it should be noted that most other countries control healthcare costs by means of “all-payer regulation” — that is, government-imposed price controls — not by means of market competition, the right’s unrealistic panacea, which no other nation uses, for the reason that simple market economics does not work in the healthcare sector.  For the purposes of this discussion, it is sufficient to reproduce a final chart from the CBO report, Figure 5, “Federal Spending for Medicare and Medicaid as a Percentage of Gross Domestic Product Under Different Assumptions About Excess Cost Growth.”

Note that if the excess cost growth problem is solved, then the nightmare scenario never materializes, either in the near future or the distant future.  Indeed, in the last few years, partly because of the loss of employer-based healthcare by the unemployed, and partly because of reforms in medical provision, healthcare cost growth in the U.S. has slowed.  If that trend continues, then conservatives will no longer be able to claim that healthcare in general (not just Medicare and Medicaid) will eat up half the economy in 2082.  The right will have to use other arguments to discredit Social Security and Medicare, like the hoary old claim that these programs are fascist or communist — an argument that has never persuaded the growing number of American voters who depend on Social Security and Medicare for their retirements and for protecting their physical health.

Philip Klein concludes his Op-Ed about how the welfare state is destroying America with further nonsense (you can’t claim he isn’t consistent).  Reciting yet another right-wing myth, Klein asserts that because of Social Security and Medicare, the bond markets in general and the Chinese government in particular will stop lending America money and interest rates will skyrocket, destroying the American economy, yadda yadda yadda:

Just this past August, Standard and Poor’s downgraded U.S. debt for the first time in American history. Once bond holders abandon America, the nation will either have to dramatically cut spending, raise taxes steeply, or print money to buy up the debt — which would trigger massive inflation.

Where has he been since last August?  Even a senior editorial writer at the Washington Examiner should be aware that the downgrading of America’s credit rating was followed by a rush of money into American bonds, not out of them, in defiance of the predictions of the deficit hawks. Evidently the bond markets think America is the world’s safe haven and are not terribly worried about long-term American entitlement costs.

The growing debt burden is also a national security risk, because it reduces America’s leverage against nations such as China, which owns a substantial amount of U.S. debt. And the fiscal crunch will force devastating cuts to our military — far beyond anything contemplated today.

Somebody should tell Klein that China’s export-oriented growth model depends on keeping its currency undervalued and accumulating dollars, which it then uses to buy dollar-denominated debt like U.S. Treasury bonds.  If China revalued its currency, it would stop buying bonds to the detriment of its industries and to the benefit of many American exporters.  If this were to happen, the U.S. deficit would shrink and we would need less external financing.  Hurrah! In the long run there doubtless will be increases in U.S. interest rates, but they are unlikely to come about for the reasons that Klein and other apocalyptics on the right predict.

As for the Pentagon, the chief threat to the future of the U.S. military is neither the American welfare state nor the Chinese financial authorities, but the conservative wing of the Republican Party, which prefers round after round of tax cuts for the rich to the taxes that would permit the U.S. to fund both an adequate military and an affordable welfare state.

Klein concludes inescapably:

Thus, the conclusion is inescapable that, if America doesn’t end the welfare state as we have known it since 1935, it will end America as we know it today.

It may seem cruel to pick on Philip Klein, who is, after all, simply one of many minor hacks in the right-wing media machine controlled by billionaires like Anshutz and the Koch brothers.  But it is worth reading the right’s propaganda now and then, just to find out how it is that so many of our conservative fellow citizens can have been so deceived.

Between 1980 and 2008, inclusive, there have been eight presidential elections.  The Republicans have nominated five presidential candidates — Ronald Reagan, George Herbert Walker Bush, Bob Dole, George W. Bush and John McCain.  During the same time, the Democrats have nominated seven presidential candidates — Jimmy Carter, Walter Mondale, Michael Dukakis, Bill Clinton, Al Gore, John Kerry and Barack Obama.

The middle-class Republican candidates — Reagan and Dole — have been outnumbered by the candidates born into the social elite — the two Bushes and McCain.  George Herbert Walker Bush’s father, and George W.’s grandfather, Prescott Bush, was a wealthy Connecticut senator, whose own father, Samuel Prescott Bush, was a rich steel and railroad company executive.  John McCain’s father and grandfather were both four-star admirals.

Among Democratic presidential nominees in the same era, only Kerry — related to the wealthy Forbes, Winthrop and Dudley families of the Northeast — could claim anything like the pedigree of the Bushes.  If it takes three generations to make a gentleman, or even two, Al Gore doesn’t qualify as upper class.  His father, who preceded him as a senator from Tennessee, came from a modest background and received his law degree from the Nashville YMCA Night School of Law.  The other Democratic nominees in the 1980-2008 period came from middle-class backgrounds, like Barack Obama, the son of two college professors.  Bill Clinton was born into the lower middle class.

The plot thickens further, when Republican denunciations of government as tyranny are contrasted with the multi-generational commitment to public service on the part of Republican presidential candidates.  Samuel Prescott Bush, who served in the government during World War I, founded a dynasty that has produced a Connecticut senator, Prescott Bush; a Texas congressman and president, George Herbert Walker Bush; a Texas governor and president, George W. Bush; and a Florida governor, Jeb Bush.  John McCain, as we have seen, is the heir to a family tradition of military service.  Mitt Romney, the former governor of Massachusetts, is the son of George Romney, who was governor of Michigan.

So much for pork-rind populism.

The mystery deepens even further.  In the 19th century, the Republican Party was founded by Abraham Lincoln and others, devoted to the Henry Clay’s idea of the “self-made man.”  But in spite of conservative rhetoric about small business, today’s Republican economic orthodoxy does not promote the interests of entrepreneurs or industrial capitalism.  Instead, it promotes the economic interests of rentiers — families with inherited wealth and Wall Street investors — the kind of people who make money in their sleep, in the words of the 19th-century classical liberal economist J.S. Mill, who despised them.

The GOP crusade to abolish the estate tax — the “death tax” — does nothing for American business in general, even as it chiefly benefits the trust fund babies of a few super-rich families.  A lower tax rate for capital gains than for earned income means that the idle rich, and the hedge fund managers who manage their assets and are taxed at the capital gains rate, pay a much lower tax rate on their income than the majority of Americans who depend on wages or professional fees for a living.  Self-made entrepreneurs?  Hardly.

Nor does Republicanomics serve the interests of captains of industry.  If the Republican economic plan were drafted by CEOs of American-based companies that actually make things, rather than rearrange money, it would not necessarily please liberals but it would bear little resemblance to the rentier-friendly plans pushed by the Wall Street right.  The emphasis would be on a permanent R&D tax credit, lower corporate taxes, depreciation allowances, public infrastructure investment, policies to lower the costs of energy and other inputs, dollar devaluation and other policies to promote the inshoring of production in America.  Genuine captains of industry would not assign priority to estate tax relief and low capital gains taxes for the benefit of the trust fund set like the Bushes and Romneys.

The conclusion is inescapable.  The Republican Party is not really a pro-business party at all.  It is a pro-hereditary wealth party.  Its platform serves the interests of those few Americans who are born into wealth and seek to preserve their fortunes, not those who start new companies or invent new technologies.  Naturally, therefore, the party’s presidential candidates are chosen nowadays from among the pedigreed, hereditary social elite who are the chief beneficiaries of its policies.

How is it, then, that the party of old money has succeeded in winning the vote of the white working class since Nixon and Reagan?  To understand how this could occur, we need only look at American history.

In the 19th century the Jacksonian coalition, then identified with the Democrats beginning with Andrew Jackson, was, like the Republican Party today, based on an alliance of white Southerners and Southwesterners with working-class whites in the North.  Like today’s neo-Jacksonian Republicans, the original Jacksonians posed as the champions of the common man, denouncing government tyranny and privilege.

But Jacksonian common-man rhetoric was a camouflage for the interests of the most parasitic rentier elite in American history: the Southern slaveowners, including Andrew Jackson himself.  The rentiers of the plantation South were allied with Northern crony capitalists — businessmen and bankers who sought to loot the public domain by means of what today would be called “privatization.”  That is why the Jackson administration destroyed the Bank of the United States, a quasi-public agency that was the largest corporation in the country, and distributed its financial assets to “pet banks” allied with Jackson and his cronies.  The modern equivalent would be the privatization of Social Security and Medicare and the diversion of their vast revenues into private hands, which, of course, is the centerpiece of the Republican economic agenda for America.

Old or new, Jacksonianism has always combined the pretense of egalitarian rebellion against privilege with the reality of domination by upper-class rentiers and crony capitalists.  In the 21st century as in the 19th, the Jacksonian oligarchs divert the attention of their yeoman followers from what is going on by means of military jingoism (Jackson bellowed at France, today’s Republicans threaten Iran).  Central to the Jacksonian tradition is the exploitation of paranoid fears of federal tyranny, combined with dark undercurrents of racism (witness Ron Paul’s recent denunciation of the Civil Rights Act and the blacks-on-welfare trope cynically deployed by Gingrich and Santorum).

Can the Jacksonian trick of enlisting the white working class in the service of hereditary wealth and crony capitalism work again?  Why not?  It has worked before.

Isolationism was championed by some like the conservative commentator Patrick Buchanan.  Another alternative, championed by scholars like Stephen Walt and John Mearsheimer, was “realism” — a policy of selective engagement of the world that emphasized the national interest and minimized attempts by the U.S. and other outsiders to remake foreign societies.  Yet a third alternative was liberal internationalism, a strategy founded on an attempt to realize Woodrow Wilson’s dreams of collective security based on international institutions like the United Nations and NATO.  The fourth alternative has been described as “hegemony” or “empire” — a policy of indefinite American global military domination. This view was backed most vigorously by the neoconservative pundit Charles Krauthammer and William Kristol’s the Weekly Standard.

The post-Cold War debate was vigorous and did not necessarily follow party lines. The right, for example, was divided among hegemonists, realists and isolationists, while progressive views on American strategy ranged from neo-isolationism to versions of American hegemony.

The great debate about American strategy came to an abrupt end with the Gulf War in early 1991. The ease with which America’s armed forces defeated the regime of Saddam Hussein, who was left in power and contained in part of his territory, convinced America’s foreign policy establishment that the benefits of America’s global hegemony as the “sole remaining superpower” were great while the costs were extremely low. The new bipartisan consensus was consolidated during the Wars of the Yugoslav Succession, when triumphant “humanitarian hawks” insisted that anyone who opposed U.S./Nato intervention in the Balkan wars was an immoral appeaser of Nazi-like evil.

On 9/11/2001 the al-Qaida attacks cemented the consensus even further.  Until then, the maintenance of a U.S. military that had been only moderately downsized from its Cold War proportions had been justified by the grossly exaggerated threats alleged to have been posed by “rogue states” like Iraq and North Korea and Iran.  Now there was a new enemy to justify a huge, global U.S. military: stateless terrorism.  Absurdly, many American statesmen and foreign policy experts treated jihadists not as criminal gangs comparable to the mafia and drug cartels but as soldiers of a virtual superpower, comparable somehow to Nazi Germany or the Soviet Union.  Post-9/11 panic, cynically stoked by conservatives for electoral purposes, added layer on layer to a clumsy, labyrinthine homeland security bureaucracy while justifying spending on Pentagon weapons systems whose usefulness in fighting jihadists was slight or nonexistent.  The neoconservative scholar Eliot Cohen and the neoconservative editor Norman Podhoretz declared that the U.S. was engaged in “World War IV” (World War III having been the Cold War).  Others called it the Long War.

Well, World War IV is now over, according to President Obama.  The Long War turned out not to be all that long.

In announcing the new orientation of American security strategy last week, the president emphasized that the U.S. will maintain its position as the leading military power in the world; no president, in this generation, could do otherwise.  What is striking, however, is the speed with which the Obama administration has not only wound down the wars in Iraq and Afghanistan but repudiated the post-1989 consensus.

According to the new vision of American defense, the U.S. will reorient itself from fighting wars of nation-building and counterinsurgency in the Muslim world to focusing on balancing the power of rising states in East Asia (read China).  This reflects the classic logic of realpolitik, not neoconservative hegemonism or neoliberal Wilsonianism.  The shift in emphasis from quasi-colonial nation-building, which requires many American boots on the ground, to strategies that rely more on local allies, special forces and the (morally and legally problematic, it should be said) use of drones represents another break with the strategy of the Bush/Cheney years.

Needless to say, this is not enough of a change for isolationists on both sides of the spectrum who would not be satisfied unless the U.S. ended its participation in power politics beyond its borders and reduced the Navy to the Coast Guard.  And it may very well be that some of the proponents of the new strategy themselves think that it can achieve what the scholar David Calleo has called “hegemony on the cheap.”

But hegemony on the cheap is not hegemony.  Those of us who criticized the hegemony strategy from the late 1980s argued that, while in theory the U.S. might be able to create something like a global empire, the American people would not be willing to pay the required price in blood and treasure.  The relative swiftness with which the public turned against the wars in Iraq and Afghanistan, even though the fatalities were far lower than those in Korea and Vietnam that ultimately undermined public support for those earlier wars, proved that the American people never bought the “World War IV’ scenario.  Notwithstanding the horror of 9/11, Americans considered the stakes of the misnamed “war on terrorism” to be relatively low, and so they were willing to pay relatively little (by historical standards; for service members killed or maimed in these recent wars and their families, the costs could not have been higher).

While it marks a great improvement over the semi-imperial hegemony strategy embraced in the 1990s and 2000s by neoconservatives and neoliberals, the neo-realist strategy of the Obama administration can be criticized.  For example, the idea that China can be contained by U.S. forces prepositioned in Japan and South Korea and Australia (Australia?) just seems silly, as well as needlessly provocative.  There is really no parallel between U.S. troops stationed in a divided Europe to deter the Red Army and American naval and Marine bases scattered around Asia and the Pacific.

If, God forbid, there were a Sino-American Cold War II, it is extremely unlikely that it would escalate into Sino-American naval clashes in the South China Sea or the Straits of Molucca — to name only two implausible scenarios used sometimes to justify spending on old-fashioned surface fleets. More likely, conventional as well as nuclear deterrence would prevent direct conflict among the great powers, whose competition instead would take the form of low-level proxy wars in war-torn countries in Asia, Africa, the Middle East and Latin America, with the rival great powers arming and supplying opposing sides. Fantasies of a replay of the duels in World War I of the Japanese and American navies, with a future Chinese fleet replacing Japan’s, are just fantasies.

American strategy is a work in progress, and the ultimate shape of America’s next national security policy will result from struggles in Congress and the courts as well as this and future presidential administrations.  But Barack Obama deserves credit for quietly bringing to a close the misguided bid for quasi-imperial hegemony that led America astray into the sands of Iraq and Afghanistan.

As I have argued elsewhere, Obama is an Eisenhower Democrat, owing more to an older generation of moderate Eisenhower or Rockefeller Republicans than to New Deal Democrats like Franklin Roosevelt, Harry Truman, John F. Kennedy and Lyndon Johnson. In domestic policy, this is a flaw, inasmuch as Obama is drawn to the traditional moderate Republican obsessions with balanced budgets and privatized provision of public goods. But in foreign policy, the Modern Republican legacy of Dwight Eisenhower, who sought a low-cost “New Look” strategy in the Cold War, and Richard Nixon, who sought to cut America’s losses in Indochina and to base American strategy on realpolitik, is of more relevance to today’s world than the kind of overcommitment symbolized by John F. Kennedy’s grandiloquent boast in his first inaugural address that Americans would “pay any price, bear any burden, meet any hardship, support any friend, oppose any foe, in order to assure the survival and the success of liberty.” Even before the Great Recession, Americans were unwilling to pay any price and bear any burden to ensure a global Pax Americana. That may explain why, outside of the neoconservative circles, criticism of the Obama Doctrine has been so limited. The American people are tired of foreign wars and ready for nation-building at home.

 By equating the Civil Rights Act, which expanded American civil liberty, with the Patriot Act, which reduced it, on the grounds that both are federal laws with sanctions, Ron Paul displays the moral idiocy of someone who declares that a person who pushes a little old lady out of the path of a bus is just as bad as a person who pushes a little old lady into the path of a bus, because both are equally guilty of pushing little old ladies around.

Like other libertarians, Ron Paul does not understand American values.  The American experiment is an experiment in creating and maintaining a democratic republic, not a minimal state.  American political culture is founded not on the theories of Ayn Rand or Ludwig von Mises but on the reasoning of natural rights theorists like John Locke, for whom coercion in the service of communal self-defense is perfectly legitimate.  In Lockean social contract theory, in order to protect themselves from human predators, people form a community and then transfer the pooled power of self-defense to the community’s trustee, the state, the better to resist invasion and crime.  While abuses of military and police power are to be guarded against, the idea that the military and police and government as such are inherently tyrannical, a familiar theme in libertarian and anarchist thought, is utterly alien to America’s Lockean republican tradition.

Libertarians typically argue that only government, backed by military and police power, can be tyrannical.  Lockean republicans in contrast believe that private power located in the for-profit or non-profit sectors can be tyrannical, as well.  By means of their agent, the state, the sovereign people legitimately can protect themselves from predation by private sector tyrants as well as public sector tyrants.

Libertarians are not the brightest lights in the candelabra, a fact that is evident from the alternatives they tend to offer to public prevention of private abuses.  For example:  if you don’t like working a hundred hours a week for twenty-five cents a day, then find another employer!  It is obvious to intelligent people, if not libertarians, that more generous employers will price themselves out of a market whose standards are set by the most rapacious.

The other popular libertarian remedy for exploitation is to move somewhere else where you will be treated better.  But what if you can’t emigrate?  Well, it seems, you must suffer your exploitation in silence, rather than enlist the aid of the law in restraining your thuggish employer, your predatory landlord, your exploitative banker or the vendors who sell you toxic food and dangerous products.

Some libertarians concede the legitimacy of government coercion in protecting property rights.  But in doing so, these libertarians, like Ron Paul, give up any principled objection to government coercion.  They simply want government coercion to be used for some purposes—protecting property rights—and not others—enforcing civil rights.

The Civil Rights Act did not mark an intrusion of government into a realm previously governed purely by what Paul calls “private choices.”  Until the federal Civil Rights Act was passed, the coercive power of state and local governments was routinely used to enforce the “private choices” and “property rights” of racists.  If a diner owner banned blacks from his diner, and blacks sat down at the counter and insisted on being served, then the diner owner could call the police, who, protecting the property rights of the owner, would drag the would-be black patrons of the restaurant off to jail.

The straightforward way to interpret Paul’s remarks on CNN is to read him as saying that bigoted property owners, like owners of restaurants, should to this day have the right to call on the coercive power of the police department to enforce their decisions to refuse to serve certain categories of customers on their property.  Anti-semitic store owners, for example, should have the right not merely to put up a “No Jews” sign, but also to summon the police, at the taxpayer’s expense, to arrest any Jew who insisted on entering the store.

Perhaps I am misreading Paul.  Perhaps he does not think that business owners should have retained the right, abolished by the Civil Rights Act of 1964, to have the government, in the form of the police, use coercion to enforce their racist “private choices” to exclude certain classes of clients.  Perhaps he thinks that the police should not be involved in the effort to expel the Jew from the Judenrein store.  Perhaps true libertarianism means that the anti-semitic store owner should try to persuade the unwanted Jew in the store to leave by noncoercive means—“Shoo, Jew!”  Or perhaps authentic libertarianism would sanction private not public coercion, so the Jew-hating store owner should be allowed to hire Slow-Eye Pete and Philadelphia Jack to enforce the store’s No-Jew policy.

But I don’t think this is what Paul meant to say.  From his statement that the Civil Rights act “destroyed the principle of private property and private choices,” I think his meaning is quite clear:  civil rights legislation at any level—federal, state or local—should never have been passed.  To this day, store owners should be free to call on the public police at public expense to drag blacks, Jews, or members of other groups that the owners do not like from their business establishments, in the name of property rights.

Should we be impressed if Paul says that as a personal matter he would oppose such things, while defending their legality?  It is hard to see any daylight between an overt racist and someone who claims to oppose racism or anti-semitism, but also denounces the only effective ways to put a stop to them—that is, civil rights laws.  If you argue that private racism is bad but anti-racist laws are worse, and if you have no problem with the state’s coercive power when it enforces racism but object to coercive state power only in the service of anti-racism, then you cannot complain when others draw their own conclusions about your motives (even if, unlike Ron Paul, you did not publish white supremacist newsletters for years under your own name).

Abraham Lincoln dissected the sophistical rhetoric of people like Ron Paul, long before the noble word “liberty” was tortured into “libertarianism.”  In 1864, during the Civil War, he told an audience:

The world has never had a good definition of the word liberty, and the American people, just now, are much in want of one. We all declare for liberty; but in using the same word we do not all mean the same thing. With some the word liberty may mean for each man to do as he pleases with himself, and the product of his labor; while with others the same word may mean for some men to do as they please with other men, and the product of other men’s labor. Here are two, not only different, but incompatible things, called by the same name———liberty. And it follows that each of the things is, by the respective parties, called by two different and incompatible names———liberty and tyranny.

The shepherd drives the wolf from the sheep’s throat, for which the sheep thanks the shepherd as a liberator, while the wolf denounces him for the same act as the destroyer of liberty, especially as the sheep was a black one. Plainly the sheep and the wolf are not agreed upon a definition of the word liberty…