Kevin Phillips: Bad Money: Reckless Finance, Failed Politics, and the Global Crisis of American Capitalism (2008, Viking)

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(p. 16):

For the more sophisticated in Washington, the $60- to $95-a-barrel cost prevalent in 2006 and 2007 was only the most obvious of the energy-related problems. Dismissing memories of $12 oil in 1998 and $25 oil in 2003, the expert consensus was that the era of low-cost petroleum was done and gone. With the United States of 2007 producing only 35 percent of the crude it consumed -- by 2010, possibly as little as 30 percent -- the cost of buying the remainder elsewhere had become inescapable. Annual outlays for imported petroleum, $50 billion to $75 billion during most of the late eighties and nineties, had swollen to $100 billion in 2002, $130 billion in 2003, $180 billion in 2004, $232 billion in 2005, and $302 billion in 2006. The ever-larger checks written for black gold also weighed heavily in the broadest annual measurement of the U.S. trade gap: the current account deficit ($857 billion in 2006). Overall, oil-related optimism and promises by the U.S. government had not worked out since peace in occupied Iraq deteriorated into insurgency and regional separatism.

(pp. 16-17):

In 2006, Charles Weeden of Maxwell & Company, a top U.S. oil analyst, dramatized the simultaneous shortfall in new discoveries: "In 1930, we found 10 billion new barrels of oil in the world and we used 1.5 billion. We reached a [new discovery] peak in 1964 when we found 48 billion barrels and used approximately 12 billion barrels. In 1988, we found 23 billion barrels and used 23 billion. That was the crossover when we started finding less than we were using. In 2005, we found about 5 billion to 6 billion and we used 30 billion. These numbers are just overwhelming." Many well-informed geologists and industry consultants considered top producers like Russia, Saudi Arabia, and Mexico to have reserves well below what their governments publicly claimed. Each year, when members of the Association for the Study of Peak Oil convened in congenial cities like Uppsala, Sweden; Pisa, Italy; or Cork, Ireland, new evidence seemed to support their pessimistic calculations, while new speakers added luster to the cause. The sixth annual meeting in autumn 2007 saw Lord Oxburgh, a former chairman of Shell UK, predict $150-per-barrel petroleum, while James Schlesinger, the former U.S. CIA director and energy secretary, told the attendees that "the battle is over and the partisans of peak oil have won."

No one doubted that more fuel could be had from ultradeep drilling in the Gulf of Mexico and the South Atlantic; from submerged Arctic mountain ranges claimed by nearby Russia; from the western Canadian oil sands; from the heavy and superheavy oil deposits in the Orinoco Belt of eastern Venezuela; from shale oil in the U.S. Rocky Mountains; and from hard-to-reach, expensive portions of already-tapped fields the world over. The catch was twofold: deepwater drilling aside, new production was unlikely to be great, and these prospects assumed costly technology and prices remaining at or above $50-$60 per barrel. Furthermore, the up and down "market" forces generally prevalent during the twentieth-century heyday of the privately owned American and European oil giants, the famed Seven Sisters, were giving ground to the realities of lopsided control (three-quarters of world reserves) and overtly national ist agendas of the leading state-owned oil companies. In 2007, the Financial Times described Saudi Aramco, Gazprom, Petro-China, National Iranian Oil Company, Petrobras (Brazil), Petronas (Malaysia), and Petróleos de Venezuela as the "New Seven Sisters." Christophe de Margerie, the chief executive of Total,t he top French firm, described the supramarket calculus of these state companies, now that global capacity no longer sufficed to meet global demand, as marking "a revolution" in the industry.

Note that the $50-$60 per barrel minimum cited above, which seems like a bargain with oil prices running double that less than a year later, does not guarantee that Phillips' list of future oil projects can actually be developed economically. The oil sands, oil shales, and superheavy oil projects, in particular, are very energy-intensive, so their cost rises with the rising cost of oil -- all the more so when you start factoring the environmental costs in. Some substantial percentage of those reserves may never be economically developed at any marke price, for the simple reason that they produces less energy than it takes to extract and refine them.

(p. 44):

Clinton, somewhat like conservative Democratic president Grover Cleveland at the height of the late-nineteenth-century Gilded Age, slowly drifted into the orbit of New York finance. He got along well with the Republican chairman of the Federal Reserve Board; promoted Rubin to treasury secretary; raised a lot of reelection money on Wall Street (which, as will see, was also becoming more Democratic); joined with Citigroup chairman Sanford Weill, an active Democrat, to promote the sweeping federal financial deregulation act of 1999; exulted over the rocketing stock market averages; gravitated to resorts like the Hamptons and Martha's Vineyard; and on the occasion of one visit found himself hailed by a Hamptons chronicler who called the ebullient president "the spirit of the bull market." Before leaving the White House in 2001, Bill and Hillary Clinton moved their residence to New York, where Mrs. Clinton had won a U.S. Senate seat in 2000.

(p. 48):

Over the last three decades, finance cannily sidestepped the spotlight, like mushroom cultivation doing best in rich soil and darkness. Far from flagging its ascendancy with every new track or belching smokestack in the nineteenth-century manner, the financial sector -- not that the singular noun implies any single voice -- practiced a form of false modesty. References to the "real economy" in 2007 continued to suggest that U.S. finance occupied some small periphery where a hundred thousand Masters and Mistresses of the Universe collected rare wines and endlessly bought and sold structural products and derivatives with a notional value of $500 trillion [nb: he must mean billion], all the while never -- or hardly ever -- disturbing the safety and serenity of West Virginia, Wisconsin, and Wyoming. Even as the August 2007 panic subsided into autumn jitters, no serious debate about the transformation of the U.S. economy had been sparked.

(p. 62):

During his years as Fed chairman, Alan Greenspan kept a close eye on the nation's net worth numbers: Are assets rising faster than liabilities? If so, god. Back in 2002 the Fed needed housing values to climb so that net worth gains in that category would compensate for the $7 trillion lost between the stock market top in 2000 and its nadir in 2002. Then in 2006, as housing weakened, Treasury Secretary Paulson reinvigorated the Plunge Protection Team -- even the nickname smacked of assets worship -- to keep a close watch. Achieving and consolidating a 2,000-point climb in the Dow Jones Industrial Average could restore wealth in those financial ledger accounts even as home values dipped. Through mid-2007, that seemed to be on track. Financial journalists, in turn, noted how the Dow, since Paulson had taken over, had broken records for the amount of time passing without a 10 percent correction. And revealingly, on August 15 and 16, at the peak of financial market nervousness, wave after wave of stock index buys kept the correction from reaching 10 percent at any market close and thereby establishing bear market or correction status.

On jerryrigging the Consumer Price Index -- long because it wasn't obvious where to stop, and the issue is important because we depend on CPI to adjust "real" economic indicators (pp. 81-87):

The larger problem is that the federal government just isn't measuring inflation the way it used to. Until the 1990s, the CPI quite straightforwardly measured the cost of a fixed basket of goods using prevailing market prices. No statistical opportunity for clipped coinage or reminting to a lower standard existed in that constant. The current interlacing of gimmicks, by contrast, far from representing the costs of a constant standard of living, has been described by critics as measuring downward mobility -- an index that, in the words of one, "more closely represents the costs of holding to an ever declining standard of living," such as a family shifting between hamburger, pork, and chicken depending on the price."

The push to abandon the longtime fixed-basket-of-goods yardstick began in the early 1990s with Federal Reserve chairman Alan Greenspan and Michael Boskin, chairman of the Council of Economic Advisers under President George H. W. Bush. During the 1980s, Greenspan had chaired a presidential commission on Social Security that achieved no great long-term benefits changes, and by the mid-1990s he wanted to reduce Social Security outlays in the worst way, arguably just what the Boskin Commission, appointed by the new GOP Congress, recommended in its 1995 report. Social Security payments were not vulnerable to frontal political and legislative attack, so attention shifted to the CPI determination of how much retiree payments would rise each year. Greenspan and Boskin charged that the CPI overstated inflation by as much as 1.5 percent, and the Boskin Commission recommended a set of revisions to the Bureau of Labor Statistics, which generally concurred. These changes were implemented between 1997 and 1999, while the public and the politicians were preoccupied by bull market euphoria and the actions in Congress to impeach Bill Clinton.

Unfortunately for the government, a former journalist in Oakland, California, named John Williams took it upon himself and his small firm, ShadowStats.com, to calculate the CPI using the old criteria and to publish those figures alongside the new numbers. The results are disconcerting. As figure 3.3 [see below; not the exact same figure, as it extends into 2008 and includes the extra Experimental C-CPI-U line] shows, if the methodology used in 1990 still held sway, the government would have been reporting 5 to 7 percent inflation between 2005 and 2007 instead of essentially 2 to 4 percent. Statistically, that's a huge difference. For example, if 2 to 3 additional percentage points had been subtracted from the official GDP numbers in order to give inflation its due, that would have dropped the U.S. economy into recession or to its borderline.

Critics of the new methodology usually emphasized three or four deceptions. The best place to start is with the emphasis on consumer substitution that so inspired Greenspan and Boskin. The 1990-92 downturn was deep enough that suburbanites from Denver to Washington to Boston were turning to food stamps and charitable pantries; there is little reason to doubt that many were also price-shopping between hamburger, chicken, and canned stew. But we can assume others had also done so in the deep recession troughs of 1958 and 1974 without prompting the government to institutionalize such defensive approaches as a normal feature of the American dream.

Yet just this occurred in 1999, when the Bureau of Labor Statistics adopted so-called geometric weighting for its now-flexible basket of goods. Items going up received less weight, thereby easing inflation, while items becoming less expensive received more weight, likewise easing inflation. As critic Joseph Stroupe explained, "Since, in the absence of significant price inflation, consumers would be unlikely to engage in substitution on a meaningful scale, then it is also an indirect but powerful admission that significant price inflation does exist, for why else would consumers switch from more expensive items to less expensive ones?"

Which brings us to the born-again CPI's principal controversy -- the use of "hedonics" (a government attempt to measure increased pleasure) in order to moderate prices by reducing them for the increased satisfaction a consumer derives from some improvement. Caught out on a shaky limb, the government dropped its large-scale hedonic reduction of computer prices in 2003 after a critical letter from the National Science Foundation's Committee on National Statistics. Moreover, according to the BLS, the consumer electronics category, heavy with declining prices (usually exaggerated by hedonics), accounted for only 1 percent of the CPI, minimizing its practical importance.

What remained, however, was powerful data on how hedonic calculations had falsely ballooned computer sales and thereby artificially enlarged GDP growth. Steve Milunovich, a well-regarded computer analyst at Merrill Lynch, explained in a 2004 report that the federal Bureau of Economic Analysis, responsible for ascertaining the gross domestic product each quarter, had stopped reporting the real computer hardware shipment figure that was used to calculate GDP growth. The government, it seemed, decided that between the second quarter of 2000 and the fourth quarter of 2003, real tech spending had risen by $111 billion, from $446 billion to $557 billion. However, in nominal (price-tag) terms, it had climbed only from $42 billion to $88 billion. The BEA hypothesized the rest to represent the added value it perceived in computer quality! In 2007, economic historian Peter Bernstein wrote in the New York Times that because of the distortions of hedonic pricing, it might be more realistic to have a new auxiliary CPI measure that included food and energy but excluded consumer durables. Other nations have declined to use the hedonic approach. The Japanese earlier took the matter under study, and Germany's Bundesbank noted that hedonics would have increased that nation's GDP by 0.5 percent.

Even critics acknowledge that the great majority of U.S. economists favor some sort of hedonic adjustment in the CPI. One wonders if economic historians would share that view. Why now? Why not earlier? I was a teenager in the 1950s, and after spending a year in Europe, I came home in 1960 well reminded that the United States was paradise for the middle-class consumer. If hedonics properly apply to watching a current-day fifty-inch high-definition television by upgrading from a forty-two-inch version, why not back in 1952, when TV screens got big enough to watch from more than five feet away? A short list of legitimate fifties hedonics could include air conditioners, air travel (jet), automatic transmissions, barbecues, color photography, dishwashers, drugs (over-the-counter and prescription), electric shaves, Frigidaires, frozen foods -- and that's just to the letter F. To answer the question "Why now?" we must look at the historical trajectory -- and the answer is essentially inglorious.

The third fiddle in the ever-changing CPI involves how the 70 percent of Americans who own homes fail to see anything resembling their actual expenses included in the official measurement. Housing represents 40 percent of the CPI, but what the BLS computes is quite misleading. The bureau's yardstick is called "owners' equivalent rent" -- the amount that homeowners could get were they to rent out their homes. To illustrate how unresponsive this figure has been to recent homeowning realities, consider three situations. First, let us suppose the Smiths just bought a house that they had previously rented for $2,000 a month, and that their new monthly total of mortgage, insurance, and property taxes if $3,000. The effect on the CPI: zero, no increase. Now suppose they had always owned and their property tax bill just went up 40 percent. Effect on the CPI? Nil. Now suppose they bought in 2005 under an "exotic" mortgage, an dthe monthly payment has just reset from 4.5 percent to 7.5 percent. What would be the effect of those circumstances on CPI? Again nil. None of these would affect owners' equivalent rent, even though in the real world, they were out of pocket mightily.

Here, just as with food and energy, the measurement shunned because of "volatility" -- yes, housing costs are volatile -- is the one that meaningfully reflects trends. Consider, for example, the 2003-6 difference between the 5 percent yearly increase in owners' equivalent rent and the 10 to 20 percent annual increase in the S&P/Case-Shiller Home Price Index. Obviously, the OER and the home price index are not parallel. An index of mortgage payments, insurance costs, and property taxes would serve better. Still, the comparison shown in figure 3.4 is worth noting. Using the housing price data yields a CPI increase 2.5 to 4 percentage points above the official one released by the Bureau of Labor Statistics.

(p. 88):

Beginning in March 2006, the new Fed chairman, Ben Bernanke, ordered that the government cease publishing data on changes in the boradest measurement of the U.S. money supply, the so-called M3. It was expanding at a 10-12 percent annual rate in 2006; outsiders calculated that as of August 2007, that growth had accelerated to a high-powered 14 percent. This category, pulling away from the narrower measurements, M1 and M2, was arguably the one that picked up the explosion of money and credit taking place in financial sector debt. Continued publication of M3 reports would have undercut the assertion of Bernanke and Federal Reserve Board colleague Frederic Mishkin that the inflationary expectations of the public had been safely "anchored" at a low level by the tame core CPI. This suppression of data, alas, went a long way to prove Sir Walter Scott's adage about what a tangled web people weave when first they practice to deceive.

(p. 91):

Arguably, though, such religion was a logical outgrowth of an angst-threaded economic consumerism, powered by incessant "be all you want to be" advertising and funded by home equity withdrawals and credit card debt, in which a relatively small population at the top reveled in a large and rising percentage of the nation's income and wealth. While this took place, average household incomes stagnated, personal debt soared, and hints of a credit and housing crash added new worries. For some among America's less successful, the prosperity preachers and churches were probably the last resort between lost jobs or ambitions and the deeper embarrassments of home foreclosures, divorces, or bankruptcy courts.

(pp. 120-122):

Being precise about how often Britain and the United States have invaded Iraq because of petroleum -- or, for the naive among us, intervened to etablish or secure democracy -- isn't easy. In 1991, of course, and arguably in 2003. The first British military incursions, during World War I, took place while oil-rich Mesopotamia was still a provine in the Ottoman Empire. In 1941, just before Hitler's troops invaded Russia and reached as far as the Caucasus, British troops went into Iraq to stave off an oil-motivated German attack abetted by the Vichy French regime next doorin Syria. Clearly, we can't count the 1959 plot by the Central Intelligence Agency to kill Iraqi strongman Abdul Karim Qasim -- incredibly, the young Saddam Hussein was among those enlisted by the CIA -- because that did not involve an actual invasion. Neither did Washington's success, way back in the 1920s, in persuading Britain to cut the United States in for a partial share of the oil in what had become British-occupied Iraq. Petroleum-driven Anglo-American interest in the Persian Gulf goes back a long way.

Denying that the motive is oil is often wise, though, and sometimes even necessary. Lord Curzon, the British foreign secretary, drew mockery in the press and in Parliament for insisting such in 1924, although similar assertions by the U.S. president and the British prime minister in 2003 were treated respectfully. In 2007, former Federal Reserve chairman Alan Greenspan caused a stir when he stated matter-of-factly that the 2003 invasion had been about oil. Perhaps he knew, as did others, about the amount of time that Vice PResident Richard Cheney's high-powered task force on energy had spent studying the maps of the various Iraqi oil fields. In Cheney's mind, it was probably always about oil.

In any event, the apparent American attempt to make U.S. energy policy from bomb bays and guided-missile cruisers misfired in 2003. The botched occupation of Iraq boiled up into a serious local insurgency, destroying Washington's private dream of throwing open Iraqi oil spigots, driving down oil prices, and breaking the power of OPEC and its state-owned oil companies. Predictably, these producers more than shared the worldwide dismay over U.S. actions, and not just because they feared competition. By 2006 OPEC and non-OPEC petroleum exporters were also becoming more concerned about the peak-oil thesis, inasmuch as global crude oil production seemed to plateau after 2005 despite increasing world demand.

What Cheney may have feared about supply and upward price pressure in 2001 seems to have taken place, and then some. During the five years after the invasion, petroleum prices ballooned from $25 per barrel to the $100 range. This was the cause, but also the effect, of a steady slippage in the value of the U.S. dollar. The burden for the United States of having to import two-thirds of the oil it consumed became more and more costly. The price of oil rose, and Washington's credibility declined, and this double blow undermined the dollar's long-standing role in global petroleum sales -- since 1974, greenbacks had been the semiofficial currency of international oil transactions. The dollar's weakening only increased interest within a number of producing nations in two possible responses: reducing, or ending, the role of the dollar as the world's reserve currency, or pricing petroleum sales in some other currency or combination of currencies. Watchful experts in the United States knew that if producers did either, it would only add to a perception of U.S. weakness.

Actually, it's always been hard to pin down what Cheney et al. wanted to accomplish regarding Iraq's oil. To the extent that they represent oil producers as opposed to oil consumers they are most likely satisfied to have taken so much Iraqi oil off the market, in turn pushing up prices and profits for their sponsors, regardless of the harm they do to other sectors of American business. The weak dollar also helps them in some sectors, while hurting them in others. I don't know that anyone has really worked their balance sheets out, even them.

(p. 123):

Which brings us to a too-little-examined dimension of our current energy predicament: how the prior eminence of the United States in global petroleum matters has left not only an outdated infrastructure but a spectrum of disabilities, unwarranted smugness, vested interests, and booby traps. These range from currency vulnerabilities and lack of a serious national energy strategy to apparent policy inertia in Washington, where many officeholders eem unable to understand how much has changed for the United States over the last decade.

(p. 130):

At September's annual international conference of the Association for the Study of Peak Oil an dGas (ASPO) in Ireland, Lord Oxburgh, the retired chairman of Shell UK, predicted that oil would climb to $150 a barrel, while former U.S. energy secrtary and CIA director James Schlesinger, in one of a number of pithy comments, said, "The battle is over, and the oil peakists have won. Current U.S. energy policy and the administration's oil strategy in Iraq and Iran are deluded." October brought two more major conferences -- one in Texas cosponsored by the University of Houston and the U.S. section of ASPO, the second thematically named "Oil and Money" and held in London. Once again, blunt comments flowed. Speaking at the ASPO meeting in Houston, oilman T. Boone Pickens and Texas investment banker Matthew Simmons agreed that 2005 had been the global production peak year, with Simmons also reiterating his widely reported doubts about Saudi Aramco output claims.

Conference-goers in London heard experts from two OPEC nations -- Sadad al-Husseini, former chief of exploration and production at Saudi Aramco, and Shokri Ghanem, chief executive of Libya's National Oil Company. Ghanem told the audience that world production could not go above 100 million barrels a day, and that when that ceiling was reached -- optimistic U.S. officials projected that level of output by 2015 to 2020 -- global production would start to decline. Al-Husseini was even more provocative. In one of the interviews he gave at the London conference, the candid Saudi more or less agreed with the Pickens-Simmons thesis. He indicated that world production was in the process of making a 2005-7 top and would plateau for ten to fifteen years at roughly the same level, assuming prices were raised some $12 a year to incentivize the continued output of oil and other related liquids. He further suggested that world oil reserves were inflated and that 300 billion of the 1.2 trillion barrels -- mostly in the OPEC countries -- should be reclassified as speculative resources.

(p. 153):

Here we must turn to a second semantic issue -- the extent to which energy terminology has begun to change in a highly significant way. Professor Michael Klare summarizes it this way: In May, the Energy Department "stopped talking about 'oil' in its projections of future petroleum availability and began speaking of 'liquids.' The global output of 'liquids,' the department indicated, would rise from 84 million barrels of oil equivalent (mboe) per day in 2005 to a projected 117.7 mboe in 2030 -- barely enough to satisfy anticipated world demand of 117.6 mboe." Peak-oil stalwarts like Simmons have made the same point: crude-oil production is what has peaked, and the liquids -- from tar sands, oil shale, biofuels, coal-to-liquids, and gas-to-liquids -- must now be included to keep things on track. Perhaps they can do so; certainly they can for several years. But that is not the only issue. If crude production has peaked, with its many ramifications, that in itself conveys an enormously significant message.

It's worth noting here that recent announcements of Saudi plans to increase production are totally dependent on gas-to-liquids. One problem here is that light hydrocarbon liquids like butane cannot be used to produce such needed petroleum-based products as gasoline and kerosene. Such liquids have their uses, but are far more limited than crude oil.

(p. 159):

That certainly included politics. Celebrity was a boon to fundraising, if not necessarily to competence. Among the 535 members of the 107th Congress, elected in 2000, 77 were relatives of senators, representatives, governors, judges, state legislators, or local officials. In Rhode Island, after Republican Lincoln Chafee was named to his father's U.S. Senate seat, Democratic congressman Patrick Kennedy made this joke at a local roast: "Now when I hear someone talk about a Rhode Island politician whose father was a senator and who got to Washington on his family name, used cocaine and wasn't very smart, I know there is only a 50-50 chance it's me."

Phillips is refreshingly consistent in his opposition to political dynasties (pp. 161-162):

Although [Grover] Norquist and other Republicans suffered from convenient blindness and inattention in 2000 and 2004, George W. Bush from the first represented an extension of his family's biases and favoritisms. He also had family access to a huge GOP big-contributor base, was committed to Texas and oil-industry interests, and was willing to pander to the religious Right. He respected his family's long-standing alliances with the Saudis and othe rPersian Gulf elites, inherited the family's personal grudges against Saddam Hussein, and had an intense desire to attack Iraq. In winning back the White House, he also brought along employment commitments to a plethora of family political retainers, GOP lobbyists and fixers, loyal fund-raisers, and others, frequently above and beyond the usual duties and engagements of a presidential nominee. Most of the connections and commitments were visible from the start -- the big-contributor contacts smoothed the way to nomination -- although the younger Bush's intoxication by Iraq and the religious Right turned out to be particularly self-defeating.

Drawing up a similar list of the familial baggage of Hillary Clinton is in some ways easier but in other ways more difficult. In contrast to George W. Bush -- during his father's four-year term from January 1989 to January 1993, the younger bush was mostly back in Texas and not taken very seriously -- Mrs. Clinton during her husband's eight years in office was very openly and closely involved in White House policymaking. No one could call her inexperienced or unskilled. On teh contrary. Indeed, the most prominent analyses published in 2007 -- A Woman in Charge by Carl Bernstein and Her Way by New York Times reporters Jeff Gerth and Don Van Natta Jr. -- elevated her role to being almost a co-president or suggested that the Clinton blueprint had always involved a commitment to his presidency first, followed by hers. For better or worse, and despite her independent career after 2000, that legacy in itself hinted at a continuity between the policies and people of January 1993 to January 2001, and the probable policies and people should a Clinton again occupy the White House between January 2009 and January 2013. Dynasty became more of an issue in 2008 than it had been in 2000.

(pp. 177-178):

To be sure, there is some overlap betwen ardent believers in peak oil and persons worried about emissions, global warming, and a dangerous climatic tipping point. Many in both camps agree on the need to cut back on the 50 percent of U.S. oil consumption that is required to gas up fuel-guzzling automobiles. But there's much less concurrence on new fuel sources -- oil sands, coal-to-liquids, nuclear power, and the like. If one of the two energy-related showdowns can be shown as holding off until 2030 while the other lay just ahead, priorities could develop. But if one worries about both, in proximate but unknowable time frames, the pressures and potential politics get tough. Assuming that both concerns have merit, but that there is some leeway, perhaps 2016-20 could see a double dimension: rising seas and small islands going under, oil-linked civil wars in Africa, $8.75-a-gallon gasoline in California, abandoned housing in U.S. towns where commuting is no longer affordable. However, if the true believers are right about problems being nearer at hand, then the tension could intensify between 2012 and 2016. Or if the most panicked experts are correct, then the regime taking over Washington in 2009 will face the crisis.

(p. 200):

The underlying question before us in this last chapter is whether the housing and credit crisis expected to span the 2007-10 period constitutes the global crisis of American capitalism, in the sense of being the one that signals the Great Transferal to Asia. Based on the points I have made in this book, that outcome certainly seems possible. Global respect for the Unitd States slumped drastically in 2002 and following the invasion of Iraq, and then again in 2005-7 as the survey data in the appendix so unfortunately illustrates. The value of the U.S. dollar has followed pretty much the same course. Between the deepening dislike of the United States in much of teh Muslim world and the decline of the greenback, Persian Gulf states that once reinvested most of their oil revenues in U.S. bonds and kept their currencies peggedf to the dollar no longer believe that Washington is a capital city that keeps faith. Given U.S. dollar policy in 2007, it is easy to see why.

(pp. 203-204):

As suggested in chapter 2, a case can be made that Washington partially shifted to policies of financial mercantilism as early as the 1980s. This happened through that decade's series of federally orchestrataed domestic and international bailouts, accompanied in 1988 by the presidential order to set up the Working Group, with its probable covert mandate to repeat where necessary the interventions employed during the tense days of the October 1987 crash. At very least, both the facts and the inferences suggest a mockery of strict free-market economics.

No one should be surprised to read someday that during the eighties, senior officials established at least vague guidelines for a policy of maintaning national assets. Such an intention would have stretched from bank, credit, and currency bailouts to a collusive monetary poicy designed to drown any threatened asset deflation in liquidity and never, ever to pop an asset bubble. Here Greenspan and his successor, Ben Bernanke, put themselves at odds with views elsewhere in central banking circles that asset bubbles should indeed be popped -- and that U.S. unwillingness to do so might even imperil global markets. We have certainly had the bailouts and off-and-on gushes of liquidity, and the most freewheeling treasury secretaries of the last two decades, Henry Paulson and Robert Rubin, have shown a rare protectiveness toward the sanctity of stock market advances. Even Paulson's de facto soft-dollar policy of 2006 and 2007 makes sense if one takes a Machiavellian view of a commitment to maintain assets.

The cynic's explanation is this: A weak dollar stimulates exports, therby narrowing the trade deficit. A weak dollar also allows multinational corporations to (1) show larger overseas earnings (as local currencies translate into more dollars) and (2) increase the worth of their foreign holdings and subsidiaries as stated in dolllars. For Americans, a cheap currency also keeps up the nominal value of the Dow Jones, the S&P 500, and other U.S. stock market averages. Measured in euros, British pounds, or Brazilian reals, these indexes did much lesswell over the last five years than when measured in (cheap) dollars. columnist John Authers half joked that "whether they realise it or not, investors' positive sentiment int he U.S. may rest on the weak dollar."

(pp. 206-207):

There is no better distillation of the harm inflicted -- and probably yet to be inflicted -- than that of hedge fund manager Richard Bookstaber in his 2007 volume, A Demon of Our Own Design: Markets, Hedge Funds, and the Perils of Financial Innovation. His underlying point is that even though financial strategists can keep dreaming up new instruments, it's not a good idea to do so, because each innovation adds layers of increasing complexity, tight coupling, and risk. By way of comparison, "consider the progress of other products and services over the past century. From the structural design of buildings and bridges , to the opdration of oil refineries or power plants, to the safety of automobiles and airplanes, we learned our lessons. In contrast, financial markets have seen a tremendous amount of engineering in teh past 30 years, but the result has been more frequent and severe breakdowns. . . . The integration of the financial markets into a global whole, ubiquitous and timelymarke information, the array of options and other cerivative instruments -- have exaggerated the pace of activity and the complexity of financial instruments that makes crises inevitable."

Robert Kuttner: The Squandering of America: How the Failure of Our Politics Undermines Our Prosperity (2007, Knopf)

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(p. 6):

The failure of politics to seriously engage national problems goes hand in hand with the disrepair of democracy itself. For the first time in more than a century, the national government in the Bush era has spent more effort on suppressing voting than on expanding it. Serious people have good reason to believe that one or both of the last two presidential elections were stolen. Political participation is declining, as money crowds our civic engagement.

When politics does not deliver for people, the people give up on politics. Or they see politics as a realm mainly for cultural warfare, for battles over patriotism, or as something for other people. People internalize economic reversals. Pocketbook troubles seem to be private failures rather than the consequence of political choices. The very citizens most exposed to the most severe economic stress have been deserting politics at the most accelerating rate.

This disconnection of the people from their politics, in turn, leaves democracy far less energized. Consequently, when an autocratic administration ignores rights and laws, invents extraconstitutional doctrines such as presidential "signing statements," uses a state of permanent warfare to undermine free debate, or colludes in the suppression of the fundamental right to vote and to have every vote counted, there is far too little popular outcry. This is a recipe for losing both a tolerably just society and our democracy.

(p. 8):

Elites have not always been heedless of the common good. The American Republic was invented by a planter class that nonetheless believed deeply in democratic values and wanted to improve daily life for the common citizen. Many Americans of financial means were among the leaders of the abolitionist movement. In the Progressive Era, the robber barons who wanted to seize as much as possible for themselves were balanced by patrician reformers who cared about the well-being of the collectivity. Many reforms were the handiwork of the latter. Franklin D. Roosevelt, famously, was a class traitor, as were many of his New Deal colleagues. As recently as the Nixon era, there were influential progressive Republicans who supported universal health insurance, strict environmental regulation, and even a guaranteed annual income. Republicans were the stewards of fiscal responsibility. Today, it is hard to find a patrician who cares more about the republic than his own tax breaks and stock options.

(p. 11):

Politically and ideologically, the regulatory revolution of the 1930s and 1940s was possible because the usually dominant business elite was enfeebled (temporarily, as it turned out) by the practical failure of laissez-faire. Government enjoyed rare prestige in a normally libertarian country, because the federal government, under Franklin Roosevelt and Harry Truman, put people back to work, rescued capitalism from itself, then mobilized public resources to win a total-commitment war, and also underwrote new benefits, such as Social Security, unemployment compensation,the G.I. Bill of Rights, and Federal Housing Administration (FHA) loans, which allowed the Depression generation to graduate into the postwar middle class. The enterprise of managed capitalism was a practical success. Though few ordinary Americans understood this success as the achievement of a managed form of capitalism,much less knew the term, the idea was firmly implanted in the popular culture as a broadly shared premise about how the economy is supposed to work.

(p. 20):

In September 2005, Robert Gordon, an eminent and mainstream economist at Northwestern University, and his colleague Ian Dew-Becker presented a scholarly paper at the Brookings Institution entitled "Where Did the Productivity Growth Go?" They found, studying Census Bureau and Bureau of Labor Statistics data, that during the entire period 1966-2001, "Only the top ten percent of the income distribution enjoyed a growth rate of real wage and salary income equal to or above the average rate of economy-wide productivity growth." Just one American in ten captured the lion's share of society's productivity growth -- for three decades. And even this understates what actually occurred. It was the top one tenth of 1 percent that gained the very most. Those between the 80th and 90th percentiles about held their own. Those between the 95th and 99th percentiles gained 29 percent, those from 99 to 99.9 gained 73 percent, and the top one tenth of 1 percent of the population -- one American in a thousand -- gained a staggering 291 percent. By 2004, more income went to the top 1 percent than to the entire bottom 50 percent.

(pp. 20-21):

The Economic Policy Institute reported that in 1979, the top 1 percent had 9.3 percent of all income. By 2000, this share had almost doubled, to 17.8 percent. Were it not for the fact that the average family was working at least 500 more hours a year in 2000 than in 1970, mainly because of women's mass entry into the paid labor force, incomes for the vast middle would have fallen even farther behind. This increase in the work hours required to make ends meet, and the concomitant reduction in leisure and in time for child rearing, is also a real decline in living standards that doesn't show up in the household income statistics.

(p. 27):

For example, economists calculate that helping young adults to get on the home ownership ladder earlier in their lives offers a very substantial economic boost. They begin accumulating equity sooner, they realize tax benefits, and they are spared from having to pay exorbitant and rising shares of their incomes for rent as they have children and need more space. They are likely to acquire better first homes and build wealth earlier in life -- and for most Americans, the equity in their homes is their principal form of net worth. As housing prices have outstripped income, delaying first-time home ownership also increases the entry cost.

(p. 32):

In truth, the ideal of an Ownership Society in America is more than two hundred years old, and it has entailed the affirmative use of government mainly to help ordinary people -- exactly the opposite of the radical individualism plus tax incentives commended by the Right. America has a high rate of home ownership because Thomas Jefferson was committed to land tenure policies that favored small freeholders; Lincoln gave us the Homestead Acts, which allowed people without financial wealth to become farmer-owners; Roosevelt's administration invented the federally insured self-amortizing mortgage; and Truman's offered even cheaper mortgages via the G.I. Bill of Rights. We are a well-educated nation because we were the first to have free, tax-supported public schools, and government began subsidizing broad-based higher education with land-grant colleges beginning in 1862. We have enjoyed secure retirement because of a blend of Social Security and tax-favored private pensions. In every case, government serves the goal of individual self-reliance and achievement. In no case is the risk piled solely onto the individual. The Right has sought to appropriate this legacy, but its policies would actually reverse it.

(p. 35):

The two generations that reached retirement age after 1955 benefited not just from more reliable private pensions. Social Security payouts as a share of lifetime income steadily increased until the early 1980s. Real incomes rose, making it easier to save. And there was a one-time windfall in the rising value of owner-occupied housing. Every one of these supports is going into reverse. A 2006 study by Munnell and Sundén on retirement insecurity calculates the combined effect of all these factors in income adequacy for the elderly. They find that 35 percent of "early boomers," those born between 1946 and 1954, will be at serious risk of not having enough income when they begin retiring late in this decade. For "late boomers," born between 1955 and 1964, the proportion at risk rises to 44 percent. And for "Generation X," born between 1965 and 1972, the number is 49 percent. Of course, it is lower-income people who fave the greatest risk, while those who inherit substantial sums from affluent parents, whatever their own lifetime earnings and savings habits, face little risk at all.

(pp. 44-45):

As government has largely ceased to offset the instability of markets, ordinary voters have given up on government making much of a difference in their lives. The ideology of deregulation has become dominant in both political parties. Republicans have been so successful at two rounds of tax cutting and deficit deepening (in the eras of Reagan and Bush I, and then again under Bush II) that many Democrats now see their main task as balancing the budget rather than restoring economic opportunity. This has the handy side effect of neutering the Democrats politically. Budget balancing is not exactly a clarion call to economically frustrated citizens, so the potential alliance between Democrats and alienated voters is never consummated. In addition, since Jimmy Carter's presidency, many Democrats have colluded in the Republican project of government bashing. Even when they don't openly disparage government, most Democrats are unfriendly to economic regulation.

(pp. 47-48):

None of this pulling away at the top and widened inequality is the result of "the market," as if markets were spontaneous creations of nature. All functioning markets are creatures of laws, beginning with laws defining and protecting basic property rights, laws creating and privileging corporations as legal "persons," and laws defining the right of shareholders and duties of corporate boards. Laws can lead to a narrower or broader diffusion and an economy's benefits. In the past three decades, because of the capture of the political process by economic elites, the movement in the evolution of laws governing capitalism has been entirely in one direction -- toward a legal conception of markets that narrows rather than broadens concentrations of wealth.

(pp. 60-61):

Plenty of innovation will still occur. Back in the era of a more equal America, entrepreneurs innovated even though their financial returns were only in the tens of millions rather than the billions. And some, like Jonas Salk, or Tim Berners-Lee, who created the World Wide Web, did it for the sheer joy of making a better world and settled for a decent professional income. Indeed, the whole culture of windfall gain is at risk of crowding out the necessary public-mindedness of scientists, doctors, and educators, most of whom would happily take a congenial work environment and a good professional salary, but whose peer culture is signaling them that they are suckers unless they go for astronomical incomes. This trend is corrupting the values of fields like scientific research.

(pp. 68-69):

For every genuine entrepreneur who invents something truly new and who arguably "deserves" annual income in the tens or hundreds of millions, there are countless routine corporate CEOs tending mature companies who have increased their typical earnings tenfold sine the 1980s without adding anything like that multiple to the corporation's wealth creation. They are simply taking a free ride on the shifting norms of what CEOs are paid, norms that are largely the fruits o the winner-take-all psychology promoted by deregulation. Every year, the financial press reports on innumerable CEOs whose pay rose while the company's earnings fell.

(pp. 73-74):

In their essence, the Wall Street scandals of the 1990s were about conflicts of interest -- invited by deregulation and abused by insiders to their own financial advantage. In almost every case, the speculations involved borrowed money, often deliberately concealed and thus exponentially increasing the risk of loss in the event of a sudden downturn, miscalculation, or exposure of fraud. Far from enhancing economic efficiency -- always the rationale for giving financial markets and their speculators more license -- deregulation promoted insiders' enrichment at the expense of small investors, ordinary employees, and pensioners and jeopardized the efficiency and solvency of the system as a whole.

(pp. 74-75):

In the 1980s and 1990s, however, every element of agency failed. Deregulation and lax enforcement of the regulations that remained eroded professional norms that had constrained rank opportunism. Supposedly independent auditors colluded with management to dress up corporate books. Ostensibly fair-minded securities analysts serving investors turned out to be stock touts looking to bring their firm underwriting business based on their success in running up a client company's share price. Boards of directors that allegedly represented shareholders helped crony CEOs reap astronomical compensation packages largely disconnected from actual company performance. Corporate boards promoted stock options that gave executives incentives not to optimize true performance but to inflate the share price in the short run. Mutual funds, rather than serving as the agents of investors, took huge transaction fees and invariably voted their shares with management. Brokers and investment bankers helped themselves and their favorite clients to new stock issues (IPOs) at preferential prices not available to the public. Institutions of self-regulation, such as the National Association of Securities Dealers, the American Institute of Certified Public Accountants, and the New York Stock Exchange, went after minor infractions but not the deeper corruption.

(p. 96):

The oil shock of 1973 and higher inflation created an opening for financial deregulation in several ways. The fixed exchange rates that had anchored the global trading system failed to hold. With U.S. inflation rising and foreigners clamoring to exchange dollars for gold, President Richard Nixon abruptly delinked the dollar from gold and shifted to a regime of floating exchange rates. Floating rates, whose values were set daily by trading markets, quickly offered a whole new set of opportunities to speculate in currencies, often destabilizing entire economies. Inflation also played havoc with the regulation of the interest that federally insured banks and thrift institutions could pay on savings and checking accounts. The regulatory premise was that if banks got into the game of bidding for deposits, as they had done in the 1920s, they would then need to earn higher rates of return and might take unacceptable risks with depositors' money (which in fact they did, both then and now).

(pp. 112-113):

In an era of derivatives, margin regulation has become a joke, something that restricts only the small and the unsophisticated. Banks collude in the circumvention of margin limits, and regulators collude in the banks' behavior. Hedge funds borrow their money from the largest money center banks, often at preferential rates because they are such large borrowers. The transactions are presumably safe, because many trades in derivatives are settled daily, although some hedge funds have bargained for, and received, long-term lines of credit. In ordinary transactions, banks are owed the money to settle a hedge fund market play. But in another major hedge fund collapse, there would be no market for these derivatives, the hedge fund would quickly run out of money to pay off the banks, and liquidity would dry up. Moreover, with the merger and consolidation of major lending institutions into a handful of trillion-dollar behemoths, a great many hedge funds are making essentially the same bets, financed by the same banks.

(pp. 120-121):

Burger King was taken private in 2002. In February 2006, it was taken public again. The private owners, a consortium of the Texas Pacific Group and Bain Capital, more than tripled their stake in less than four years. Burger king is roughly as profitable today as it was in 2002, though its market share has continued to fall. Is it really possible to triple the efficiency of a commodity business such as selling fast food? Or were these private-equity firms cooking the books along with the burgers? Barring a lawsuit charging outright fraud (which is far more difficult today, thanks to the legislation passed by the Republican Congress in 1996), we'll never know, since once a company is taken private it enters a regulatory black hole.

Private-equity funds promote these deals not just for the opportunity to make a quick killing on the acquisition and resale. There are also lucrative fees to be had. For instance, in the Burger King buyout from a British-owned chain, the two private investment firms collected an initial $22.4 million in unspecified fees. Burger King then began paying its new owners quarterly management fees for monitoring its business and serving on its board. In 2006, these fees added up to $29 million. And just before the new public offering, the owners voted themselves a handsome $367 million dividend. Finally, the two private investment firms collected a $30 million "termination fee" from the company for selling it off.

One of the owners who flipped Burger King for a quick profit, Bain Capital, is a well-established private investment firm cofounded by former Massachusetts governor Mitt Romney. In 2005, it tried to buy the entire National Hockey League. The other owner, Texas Pacific Group, works closely with Goldman Sachs. With private-equity firms proliferating, the big, established Wall Street houses are not about to let independent operators make off with this lucrative business. Goldman has so many fingers in so many pies that it can make money on fees, commissions, underwriting, lending, and in this case as an owner/speculator. When Burger King started selling shares to the public again, Goldman reaped another $6.3 million in underwriting fees. The two private-equity firms ended up tripling their original investment, yet, after selling some shares to the public, still retained a 76 percent stake. What, exactly, did the new owners contribute?

(p. 124):

As evidence, Pearlstein got hold of a memo from another private-equity pioneer, Bill Conway, a founder of the Carlyle Group. Conway warned: "Frankly, there is so much liquidity in the world that lenders (even 'our' lenders) are making very risky credit decisions. . . . I know the longer it lasts the more money our investors (and we) will make. . . . And I know that the longer it lasts, the worse it will be when it ends." Pearlstein and other commentators pointed to the huge potential for conflicts of interest between the general and limited partners of Blackstone and their public shareholders. "[W]hen the market finally turns and deals blow up," Pearlstein warned, "you can be pretty sure that fund managers will do everything they can to protect themselves and the interests of their limited partners and let the saps who are public shareholders take it on the chin."

(p. 136):

If public policy makers wish to help more low-income Americans become home owners, there is a far better approach than relying on sleazy mortgage brokers peddling bait-and-switch products that leave a trail of foreclosure and heartbreak. At other times in our history, the government has offered subsidized mortgages to first-time home buyers through the VA and FHA. The 3 percent down payment loans offered through FHA have a far lower default rate than those of subprime lenders. Government-backed nonprofits such as Neighborhood Housing Services of America are not in the mortgage business for a quick buck but to counsel low-income home buyers and to work with them for the long haul. Neighborhood Housing Service's foreclosure rate is close to zero.

(pp. 170-171):

Today there is a deficit problem once again, because of the huge holes blown in the tax code by several rounds of tax cuts. Vice President Dick Cheney said out loud in 2002 what as lot of Republican politicians privately believed: "Deficits don't matter." The public outcry of 1992 had come and gone. Republicans and the business elite seemed to care about deficits when they could be blamed on Democratic "tax and spend" but not when they resulted from Republican tax cuts. Grover Norquist, the Republican tax-cut strategist, articulated the real game: "Starve the beast." The real point of the tax cuts was to create an endless cycle of deficit crises whose cure would be more cuts in spending.

Precious few Republicans put fiscal balance ahead of tax cutting. That left the Democrats as the paladins of deficit reduction. In July 2006, the Democratic House leader and later Speaker, Nancy Pelosi, solemnly pledged that every penny of money gleaned from any reduction in the Bush tax cuts would go for deficit reduction, not new social outlay. This deficit-hawk role is not only thankless but self-defeating. As a matter of politics, Cheney is right. After seeing the deficit wolf banished in the 1990s, most voters don't care much about deficits in the 2000s. But by sticking Democrats with the green-eyeshade role, Republicans astutely deprive Democrats of pocketbook themes that might actually rally voters. And as a matter of economics, Stiglitz is right: too much deficit reduction is as bad for the economy as too little.

(p. 200):

In the United States, median-income workers in 2006 paid a much higher combined rate in payroll taxes, income taxes, and sales taxes than they did in 1966, even though total public outlay relative to GDP was almost identical. In the 1960s, corporate tax receipts produced 16.1 percent of all federal revenue. Though corporate profits are a higher fraction of GDP than ever, corporate tax revenues fell to 9.4 percent in the 1990s and around 7 percent of federal tax receipts today. The same pattern has occurred in nearly every OECD member country.

A related effect of globalization is a huge increase in the opportunities for semilegal tax avoidance as well as criminal tax evasion, both abetted by conservative governments that are happy to see corporations escape taxation one way or another. Arguably legal tax avoidance schemes have become so complex in recent years that national tax authorities mostly throw up their hands. Even mainstream corporate tax planning, using global accounting maneuvers, costs national treasuries several hundreds of billions of dollars each year. Meanwhile, the auditing resources of the IRS have been shifted from corporations and the complex tax avoidance partnerships used by the wealthy to investigations of the modest earned income tax credit available to the working poor.

A multinational corporation with operations in several countries can arrange its internal bookeeping to minimize taxes owed. Within limits, this tactic, known as transfer pricing, is legal. It is the reason that the tax counsels of large corporations can earn seven-figure salaries for saving their companies nine-and ten-figure tax bills.

(pp. 202-203):

In principle, it would not be difficult for the advanced countries to put tax havens out of business. The major trading nations would simply enact reciprocal national laws, requiring any bank, corporation, partnership, or individual doing business both in the treaty country and with a bank or corporation located in a tax haven to report to domestic tax authorities all financial transactions using the tax haven. Alternatively, the major nations could flatly prohibit commerce with countries that refused to sign tax enforcement treaties. What prevents governments from doing this is of course the political power of organized business.

(pp. 219-220):

Instead, American leaders beginning with Alexander Hamilton thought it was smarter for the nation to pursue advantage in industry as well as agriculture. So the United States industrialized behind high tariff walls. Not only did we have tariffs, but we used what today would be called an industrial policy. The railroads were given land grants equal to 8 percent of the surface area of the United States -- land that they could rent or sell to finance construction. It was a pure government subsidy of an emerging industry. Beginning in 1862, the government invested in public universities to promote the mechanical arts and in agricultural extension to foster technical advances in farming. World War II and the Cold War functioned as immense, if tacit, technology policies.

Every other emergent nation reached similar conclusions. Each practiced its own variations on economic nationalism, many with far more direct government involvement in the industrial economy than in the United States and far more nakedly protectionist policies. France and Germany, and later Japan, Korea, Brazil, India, and China, all developed their industries pursuing diverse forms of what economists today call strategic trade, or neomercantilism.

The appeal of acquiring industry is not hard to discern. Even if a nation has plenty of raw materials, extractive industries tend to be economically static. Many economists have commented on the paradox of mineral-rich nations being mired in poverty. In practice, mineral wealth is often exploited by foreign corporations, and of course the materials eventually run out. Even agriculture, though more technically dynamic, is less so than industry and is dependent on fluctuations of world commodity prices.

Manufacturing allows nations to begin with fairly simple production and move quickly up the ladder. There are multiple linkages among manufacturing, technology, education, workers' skills, high-productivity jobs, and national wealth. Though the theory of comparative advantage counsels that nations should maximize their well-being simply by importing such products from the most efficient current exporter, the leaders of most developing nations are more astute than the standard economic model. It makes sense to use government policies to capture leadership in dynamic sectors of the economy.

(pp. 227-228):

Though some East Asian nations became more marketlike in some respects, such as having somewhat open consumer economies, in their production systems they continued to use various forms of state assistance and state-guided development strategies combined with high domestic savings rates, and they became export powerhouses. With the United States as the only major nation whose government did not care where production was located, the American economy became the residual recipient for the exports of these rapidly growing economies. Our manufacturing economy suffered, and our trade deficit became permanent and structural. India's fast-growing economy, for example, sends about 65 percent of its exports to the United States and only 3 percent to Japan. With Japan having roughly half the GDP of the United States, its share of India's exports should be about ten times as large as it currently is.

(p. 229):

Because the United States' trade policy lacks a strategic focus, its response to foreign challenges has been episodic and inconsistent. The consequence is that vital industries and technologies developed in the United States are losing market share, leaving it with a structural trade imbalance. It is this reality of other nations' practicing strategic trade -- not the low U.S. domestic savings rate or the federal budget deficit -- that explains most of the wide and growing trade gap, which will soon top one trillion dollars. Even more significant than the size of the trade deficit is the percentage of imbalance. Our imports are fully 57 percent higher than our exports, and that ratio is growing. The U.S. trade imbalance increased by 17.5 percent in 2005 alone. In 2005, our negative trade balance with China was $201 billion. That imbalance was the result of $243 billion in imports and just $42 billion in exports. For Japan, the figures were $138 billion in imports and $55 billion in exports. As other nations capture advantage in technology-intensive products, we are increasingly importing the most advanced products and exporting raw materials, or we are exporting materials for assembly and reimport. Given the truculence with which the U.S. government advances its perceived national interest in military and geostrategic areas, it seems almost bizarre that we should be so weak when it comes to advancing our trade interests.

(p. 230):

According to an authoritative review by Owen Herrnstadt of the cost of offsets, between 1993 and 2005, U.S. companies reported 8,007 offset transactions in 45 countries. The monetary value of these transactions totaled $37.3 billion. Nearly all of this represented manufacturing production that could have been done in the United States, improving our trade balance, providing good jobs for U.S. workers, and keeping American industry at the forefront of production technology. Instead, because Washington places military goals ahead of economic ones, this economic activity went overseas. Boeing, for example, has a $4.4 billion contract to provide forty F-15 fighters to South Korea. The South Koreans (who enjoy a lopsided trade surplus with the United States) negotiated a deal to have most of the parts made locally, creating high-wage jobs that otherwise would have stayed in the United States, improving our manufacturing base and balance of trade. The Koreans are also allowed to supply parts for F-15s that Boeing sells elsewhere. Sometimes the negotiated offsets are far removed from the immediate sale. After Poland joined NATO, Lockheed won a contract to supply $3.8 billion worth of F-16s. According to The New York Times, the offsets from Lockheed and its industrial partners, which Lockheed pays, include subcontracts for Poles to make commercial jet trainers as well as parts for business aircraft like the Gulfstream and Piper for export to the United States and to make the Pratt & Whitney engine for the F-16. There is also a venture with Accenture for a new technology company in Lodz and a partnership with the University of Texas to start a technology accelerator at the University of Lodz.

(pp. 245-246):

Though it is little appreciated today, global fiance built on principles of managed capitalism did not occur without a political fight. As the Roosevelt and Truman administrations promoted public institutions such as the IMF, World Bank, and Marshall Plan, the financial conservatives of that era argued that private financial flows would be ample to restart normal international commerce and to rebuilt war-torn Europe and Japan. Conservatives had made the same argument after World War I, with catastrophic results. They had added war reparations to the burden of Germany's economic recovery and created no transnational public institutions to temper the speculative, destabilizing, and ultimately deflationary influence of private capital flows. Their legacy was the Great Depression.

The difference between the 1920s, the 1940s, and our own era has nothing to do with economic fundamentals, which are unchanging. The main difference is in who had the political power to make these decisions. Of these three economic period, only in the 1940s did sponsors of managed capitalism prevail.

(p. 254):

Likewise, in the summer of 2006, oil prices soared. Hedge funds had become nervous about the Middle East summer gasoline demand slightly exceeded projections, and supply was tight. These speculative forces bid up the price of crude oil to unsustainable levels. As autumn came, and with it a supply glut, prices at the pump tumbled by more than a dollar. Political cynics imagined the Bush family calling their Saudi friends to increase supply or Dick Cheney getting on the phone to oil executives, asking them to lower retail prices in anticipation of the election. That may even have happened, but it didn't need to. The extreme swings in retail gas prices reflect how speculative hedge funds needlessly exaggerated economic, seasonal, and geopolitical factors.

(p. 259):

In recent years, the IMF has pulled back from its recipe of enforced austerity and mandatory financial market opening. Nothing fails like failure. After the East Asian collapse, many governments vowed never again to work with the IMF. The correlation between the developing nations that have followed the IMF recipe and those that have prospered is nearly a perfect refutation of the IMF's view of how economies work. In this decade, there has been a quiet financial revolution in South America, as Argentina and Brazil have paid off the last of their debts to the IMF, and most Latin American countries have just stopped doing business with the Fund, whose outstanding loans are now just a fraction of their peak.

(p. 260):

The net debt owed by the United States to foreigners rose to about $2.7 trillion in 2005, an increase of $333 billion over the previous year. In fact, the current account (mostly trade) deficit is much higher than that increase in the debt -- in 2005 it was $792 billion. The reason our total debt to foreigners did not increase by that full amount is that Americans also make investments overseas. Even with such investments, however, our net foreign indebtedness has been rising at a very rapid rate. Foreigners now hold almost 60 percent of all outstanding Treasury securities, up from 20 percent in the mid-1990s.

The excessive dependence of the U.S> economy on foreign borrowing increases the risk of a domestic depression and even a global one. The problem is not the national debt but the reliance on foreign creditors. The foreign debt, in turn, reflects the structural trade deficit. We have been borrowing our prosperity for better than two decades, and the ratio of foreign borrowing to GDP is growing. The longer an adjustment is deferred, the more serious will be the collapse.

(pp. 261-262):

A real decline in American living standards has already been baked into the national cake. It has simply been disguised, for now, by the borrowing from abroad, which must eventually be paid -- in ever-higher interest payments, the sell-off of U.S. assets that generate income, or an eventual dollar crash. About half of our foreign debt is held by foreign governments. However, the central banks of allied nations cannot keep this game going indefinitely, much as they might wish to help, because the other half of America's international creditors are still private. [ . . . ]

Eventually, a country that runs a chronic trade deficit must suffer a decline in the value of its currency. Most economists calculate that it would take a devaluation in the range of 30 percent to put America's trade deficit on a downward path. Some contend that a decline of 30 percent of the value of the dollar would not be bad. Imports would become more expensive, but that would be good for both domestic production and exports. Since virtually all of our foreign debt is denominated in dollars, a cheaper dollar would mean a write-off of that much debt. Paul Volcker points out that the dollar went through a period of overvaluation in the 1980s and declined by about 25 percent against major foreign currencies, and nothing terrible happened. However, that occurred during a period when the dollar was artificially high because of Volcker's own policies of very high interest rates and there was no overhang of foreign debt. As the Fed relented and allowed interest rates to come down, it was natural that the dollar should depreciate. Today, by contrast, dollar interest rates are low. The only reason the dollar is holding its value is that foreign central banks want it that way and manipulate their own currencies accordingly.

E.g., the dollar has declined well over 30% against the Euro and the UK Pound, but remains pegged to the Chinese Yuan, so the dollar has not gained any trade advantage against one of America's largest trading partners.

(p. 278):

Kerry, in 2004, wanted to show the Democratic base that he was on their side economically. But he also wished not to offend the economic elites. So the best he could manage was to call for arcane changes in the tax code, so that the tax system would not reward "Benedict Arnold CEOs" for moving jobs offshore. This pol-tested slogan sounded good, but few knew exactly what Kerry meant. The slogan did not bespeak any serious understanding of the trade problem or any commitment to fundamental change, nor did Kerry. Tax favoritism for offshoring jobs is perhaps a third-tier cause of job loss, if that. Nor did the slogan, in the end, resonate with voters. It was more weak tea.

(p. 280):

The politics of permanent deficits and the shift of taxes onto ordinary working people at a time of pocketbook distress has done just what Republicans hoped. It has largely depoliticized economic hardship. It has made voters resistant to any kind of taxation -- and Democrats averse to proposing even progressive tax reforms that would raise taxes only at the top and cut net taxes for most people. In the Bush era, Republicans who sponsored politics and programs opposed by substantial majorities of Americans invariably fell back on two trumps: "Democrats Won't Keep You Safe" and "Democrats Will Raise Your Taxes." Strip government of resources, put cronies in charge who are incompetent at running it, and people will stop seeing government as their ally. Even Democrats will think twice about defending government.

(pp. 294-295):

"To seniors in this country," Bush earnestly declared, "you earned your benefits, you made your plans, and President George W. Bush will keep the promise of Social Security -- no changes, no reductions, no way."

"Medicare," he added, "does more than meet the needs of our elderly; it reflects the values of our society. We will set it on firm financial ground, and make prescription drugs available and affordable for every senior who needs them."

In the third presidential debate, Bush told Gore, "You know I support a national patients' bill of rights, Mr. Vice President. And I want all people covered." He called for grants to the states "so that seniors -- poor seniors -- don't have to choose between food and medicine."

Bush pledged to change the tone in Washington, to govern as a bipartisan the way he had done as governor of Texas. "I know it's going to require a different kind of leader to go to Washington and say to both Republicans and Democrats, 'Let's come together,'" he said.

Bush repeatedly promised to balance the budget and insisted that the nation could afford a tax cut without slipping into deficit. He even criticized a House Republican plan to achieve budget savings by cutting the Earned Income Tax Credit. "I don't think they ought to balance their budget on the backs of the poor," he said.

All these declarations were, of course, lies. While all recent presidents have periodically gone back on promises and some have told explicit untruths, what's interesting is that the multiple untruths told by this president are something very rare in politics: ideological lies.

Hypocrisy, as La Rochefoucauld observed, is the homage that vice pays to virtue. In the case of Bush, campaign lies were the homage that Republican sloganeering paid to the popularity of progressive Democratic ideology.

Imagine instead that Bush had hit the campaign trail promoting a Social Security shift that would increase the system's deficits, requiring cuts in benefits and an increase in the retirement age; that he promised a tax cut that cost more than twice Social Security's long-term shortfall. Imagine that his patients' rights bill was advertised as authored by the HMO industry -- and as prohibiting patients denied care from suing their insurer; that he touted a Medicare drug plan written by the drug and insurance industries that left a $2,250 "doughnut hole" in annual coverage; that his environmental policy would scrap one protection after another and let industry rewrite the rules; that he pledged to demonize Democrats who resisted his policies; that his No Child Left Behind program pledged to freeze funding for Head Start and money for child care -- and to go back on a bipartisan deal to increase federal funds for poor public schools in exchange for high-stakes testing.

Campaigning on that set of views, Bush would have been the minority candidate of a minority party. There would have been no cliff-hanger in Florida and no narrow Supreme Court resolution of Bush v. Gore, Yet that set of views has been his actual program. And his need to prevaricate suggests the popularity of progressive economic themes.