What We Do

True story – it was December 14 in Paris almost ten years ago, cold and dark at dawn, followed by heavy rain, and I was bleary-eyed from staying up all night watching CNN-International in the hotel room. Somewhere in the middle of the night there was Al Gore on the screen, conceding the presidential election to George Bush. So that was that. And a few hours later I was across the street at the Café Bonaparte doing that French breakfast thing – lots of black coffee and smoking my pipe, and leafing through Libération and Le Figaro and Le Monde, trying to get a sense of what people made of the whole thing. Now and then I’d glance up and stare at the old church next door, where Descartes is buried.

But you can only do so much coffee, and sitting and watching, so it was walking, as the rain started. And walking the rainy December streets of Paris, with the pipe, is fine, in a Hemingway sort of way or something. The city has its winter smells – wet leaves and bread baking somewhere, and a whiff of burnt diesel from all the odd small cars. And there are the sounds – strange chatter and distant up-and-down silly sirens. And what E. M. Forster once said about winter in London was just as true in Paris – the air did taste like cold pennies. But by noon it was time to find a clean, well-lighted place, and there, in the warren of small streets behind the Odéon, was 16 Rue des Quatre-Vents, the Moosehead – everyone’s favorite Canadian bar in Paris. It would do.

And then the conversation started – with the old fellow who walked in, who claimed he ran a wire service but looked like a bum. We were about the only two customers that afternoon, so we ended up buying each other beers and talking about international politics. It was better than walking in the rain. And he was a good sort – not French, but not exactly a Brit, and certainly not an American. He’d lost it all. He wasn’t anything in particular any longer. He’d just knocked around Paris for decades on the edge of the news business, a go-between, a forwarder of this and that. But he knew things.

Of course we covered the current American political madness, and the French stuff, de Gaulle and Algeria, de Gaulle and NATO, and the nuclear weapons – the whole idea of France’s independent force de frappe and all that. We were appropriately cynical. It was all madness. But the thing I remember now is that he turned to me and said something peculiar – “You know it’s over for America, don’t you?”

The talk that followed that had to do with George Bush, as you would expect. The electoral system, never very sensible, had broken down, and the guy who had fewer votes was appointed by the Supreme Court, which was bad enough, but the guy was clearly a dim bulb with a nasty streak and a way of invoking God to avoid having to think anything through. No good would come of this.

But that’s not what the old fellow was getting at. He wanted to know just what it was Americans did. He liked the going to the moon thing, and the gaudy junk movies, and rock and jazz – but American cars were crap, everything we’d invented was now made better and cheaper elsewhere, like the electronics, and Airbus was well on its way to eating Boeing alive, and so on and so forth. What is it that we did, really, that was so cool? As far as he could tell we were a nation of consumers, producing nothing really fine – just sitting around watching television. France had the extraordinary cheese and wine, and then he pointed up to the television on the wall – the Simpsons, dubbed in French, was on. He said if we were in Germany it would be Bay Watch. And then he muttered a few things about empires in decline.

The only thing to say in response was something like wait – you’ll see. Amazing things will happen. And he smiled and bought another round of beers.

And a decade has passed. And amazing things did happen in the intervening years. And the odd old man from one afternoon may have been onto something.

And now there’s James Fallows’ authoritative new article in the Atlantic, How America Can Rise Again – we’ve had a tough ten years. He explores the question of whether the United States is in decline – we seem to be but he’s not quite sure. Maybe it’s only one thing. Consider this:

Our government is old and broken and dysfunctional, and may even be beyond repair. But … our only sane choice is to muddle through. As human beings, we ultimately become old and broken and dysfunctional – but in the meantime it makes a difference if we try. Our American republic may prove to be doomed, but it will make a difference if we improvise and strive to make the best of the path through our time – and our children’s, and their grandchildren’s – rather than succumb.

Andrew Leonard comments:

The most depressing part of Fallows’ analysis is his belief that there is nothing fundamentally wrong with “America” that can’t be fixed, except perhaps our system of government! This will ring true to anyone who paid close attention to Washington in 2009.

Leonard says all you have to do is look at California – “For no disquisition on American decline can be complete without a side trip to America’s Exhibit A for dysfunctional government.”

James Fallows does that in one paragraph:

Kevin Starr, author of an acclaimed multivolume history of California politics and culture, told me that through the 1960s, the state’s public culture was dedicated to the idea that big things could be done. “The water plan, the freeways, the universities – it was all supposed to be the greatest in the history of the human race,” he said. “It was envisioned as a higher-ed utopia. Whether you wanted to be a nuclear physicist or a beautician, the state would help get you there.” Now, as he and countless others point out, California’s system has been engineered to ensure that nothing can be done. Through ballot measures, California’s electorate votes itself increasing benefits; through other ballot measures, the public limits taxes to pay for them. Harold Varmus won his Nobel Prize for work done at UC San Francisco and still owns a house in the Bay Area. He says that thanks to California’s famous Proposition 13, which has limited property taxes over the past 30 years, his annual taxes in California are about $600 – one-twentieth of what they are for a similar property in New York.

Leonard reinforces that:

Just in the last week, the news from California only deepens the gloom. Last year’s budget meltdown is set to repeat itself in 2010: the state is looking at a new $21 billion deficit for the next fiscal year, promising another round of draconian cuts in state services and partisan intransigence. Lawmakers are hoping for more help from the federal government – and there’s a good case to be made for that, since the last thing the American economy needs as it tries to get back on its feet is a bankrupt California. But in the run-up to the midterm elections, bailing out California, no matter how strong the economic case, is unlikely to be a politically popular policy move. Meanwhile, every day brings another signpost of decline.

Can we muddle through? Does it really make a difference to try, to “improvise and strive to make the best of the path through our time,” even if the Republic, and California, are doomed? I see no other way to live, as a practical matter, but I’m not sure Fallows has told us how to rise again, or has just shown us a way to fall with honor.

Suddenly it’s a rainy December day in Paris ten years ago. Or it’s Tuesday, January 5, 2010, and Bob Herbert is offering this in the New York Times:

This is a society in deep, deep trouble and the fixes currently in the works are in no way adequate to the enormous challenges we’re facing. For example, an end to the mantra of monthly job losses would undoubtedly be welcomed. But even if the economy manages to create a few hundred thousand new jobs a month, it would do little to haul us from the unemployment pit dug for us by the Great Recession. We need to create more than 10 million new jobs just to get us back to where we were when the recession began in December 2007. What is needed are big new innovative efforts to fashion an economy that creates jobs for all who want and need to work. Just getting us back in fits and starts over the next few years to where we were when the recession began should not be acceptable to anyone. We should be moving now to invest aggressively in a new, greener economy, leading the world in the development of alternative fuels, advanced transportation networks and the effort to restrain the poisoning of the planet. We should be developing an industrial policy that emphasizes the need for America to regain its manufacturing mojo, as tough as that might seem, and we need to rebuild our infrastructure.

Duncan Black adds this:

One of my longstanding pet peeves is that everyone in the US pretends we don’t have an “industrial policy” because that implies naughty state intervention in certain sectors. But of course we have lots of naughty state intervention in certain sectors – we just don’t do it even notionally for any good reason. We prop up the single family homebuilding industry and the automobile industry (even before the bailouts). We prop up certain agricultural sectors. We favor big business over small. Now we’re massively propping up one skimmer industry – the financial industry – and are about to prop up another skimmer industry – health insurance.

Ah! That’s the answer to the question posed in Paris at the start of the decade. What is it that we do, exactly? We skim. We’re skimmers. Other people do things, often in other places, and we skim off what profits we can, by buying and selling financial instruments that tangentially refer to that activity. Cool.

Black confirms that:

So, yes, by design or accident we have industry policy. We should recognize that and then decide what we should be doing instead of pretending we don’t have any.

As does Matthew Yglesias in The Bitter Fruits of a Finance-Oriented Economy:

It’s quite true that even in America we have and have always had an “industrial policy.” That said, even if a country didn’t “do” “industrial policy” that would still be a policy and it would have consequences and there would be alternatives. I think the buzzword should probably be stricken from the lexicon since it’s so loaded and instead we can just talk about “bananas” or, you know, “economic policy.”

Yglesias notes that the economic policy in the United States has led to a situation in which finance has been increasingly important to the overall economy, and he refers to this chart, Financial-Industry Profits as a Share of US Business Profits, 1948-2007 – in 1948 under ten percent, and by 2000, more than forty percent of all business profit of any kind in America was financial industry profit, or skimming (speculative investment in notions of hypothetical value). That’s what we do.

Yglesias adds this:

I think America’s self-image in the sixties was as the country where the General Motors and Boeing and General Electric are. By the past fifteen years, that had changed to a self-image as the country where Microsoft and Google and Apple are. But to a large extent the real change is that we became the land of Citigroup and Bank of America and Wells Fargo.

And he cites the economist Maxine Udall (who has a really irritating way of referring to herself in the third person) pointing out that this has had consequences:

However, Maxine suspects that the longest term and most severe damage from the finance casino will not be from government deficits required to shore up too-big-to-fail banks and insurers. It will be from two powerful, long-standing price distortions that have distorted the composition of our labor force and the mix of human capital within it. The first distortion is the past diversion of some of our best technical and mathematical minds away from physics, engineering, biology, chemistry, and, yes, even economics, to financial modeling, risk analysis, and all the other marvelous tools of speculation and gaming. Over the last 20 years or so, the financial sector has been diverting our future scientists and mathematicians into creating new derivatives aimed at managing risk (ha!) and into developing creative investment instruments aimed at obscuring risk.

The second long-term distortion is similar to the first. Maxine is thinking of all those bright, young, energetic people who came out of some of our best universities and opted to go to work for investment banks, not in technical jobs, but as traders, ratings specialists, analysts, again to support the conversion of trillions of dollars into chaff. Many of them might have gone on to graduate degrees in chemistry, biochemistry, physics, engineering, biology or medicine. Graduate work in psychology, sociology, English, history, political science, public health would have added more value than destroying wealth across the globe. Instead of a workforce that gained diverse skills that might one day transform the world in positive and substantive ways, we have a surfeit of MBAs with concentrations in finance and empty houses on overgrown lots.

Could that be – the best and brightest now all want to be master skimmers?

Kevin Drum refines that notion:

Here’s the thing: the raw number of hotshot physicists who defected to Wall Street is actually fairly small, and probably didn’t really affect the field of physics in any measurable way. And my guess is that, in general, the kind of person who’s interested in high finance isn’t the same kind of person who’s interested in mass spectrometers and Erlenmeyer flasks. So I have my doubts that the siren song of Wall Street has really done significant damage to our technical and scientific sectors.

But the kind of person who’s interested in high finance (and big paydays) is the kind of person who’s also interested in starting up a hot new company or becoming a star manager in an existing corporation that makes actual goods and services that people use. That’s where I suspect the damage has really been done.

We are making ourselves into a nation that makes nothing, yes, but who cares about physicists? We’re losing people who create businesses:

No matter what you think of Google or IBM or Ford Motor, they’re good for the economy in a way that Goldman Sachs and the Blackstone Group just aren’t. If they lose the tippy top 1% of the young men and women who are temperamentally interested in the corporate world, then their businesses become just slightly less better-run, slightly less visionary, and slightly less ambitious. And on the flip side, all that brainpower is put to work in ways that, at best, seems to add no social value to garden variety banking, and at worst makes it actively more dangerous.

One of America’s strengths has long been its deep and strong venture capital network, and obviously we still have plenty of bright people eager to take a flyer on a new idea. But startup firms are hugely sensitive to talent (and, yes, luck), and the loss of the very best startup talent can make the difference between a success rate of 3% and a success rate of 5%. That’s a lot of Microsoft’s. And that’s what we lose when we allow Wall Street to become so insanely lucrative.

It takes one back to Paris and that question, and maybe it was this way for more than a decade, or so argues Michael Lind in a discussion of what was called the New Economy in the nineties:

Is the American economy facing a lost decade? That is the wrong question to ask. The right question is this: Is the United States facing another lost decade? During the past 10 years, inflation-adjusted wages have stagnated or declined for working Americans; net job creation has been zero; and temporary, bubble-driven gains in the stock market have been erased.

This isn’t what Bill Clinton and the other “New Democrats” of the 1990s promised us.

Remember the New Economy? The New Democrat wing of the Democratic Party, and Democratic Leadership Council and the Progressive Policy Institute said it was way cool, and made their claims:

First: The source of the boom was not a bubble associated with tech stocks, but rather a permanent increase in U.S. productivity growth produced by the information technology (I.T.) revolution. Second: Foreign money was pouring into the U.S. as a result of well-informed expectations that the U.S. would lead the world in economic growth for a long period to come. Third: Increased inequality in the U.S. was a result of the global market rewarding skilled Americans at the expense of unskilled Americans, and could be cured by more higher education.

It didn’t work out that way, and the Lind item covers the data that show that. None of it was true. And once you work through the data you get nuggets like this:

Another New Democrat myth, endlessly repeated by Clinton in the 1990s and by President Obama today, is the theory of skill-biased technical change (SBTC). SBTC held that the growing polarization of U.S. society was the result of irresistible global technological forces, not local factors with political causes, like the de-unionization of the American labor force or the inflation-caused decline of the minimum wage.

The New Democrats and like-minded Republican conservatives told us again and again that the huge gains going to CEOs and investment bankers reflected the premium attached to skills in the global “new economy.”

Even in the 1990s, this explanation made no sense. After all, the skills of CEOs and investment bankers have undergone no significant change in the last half century. If the SBTC theory had been correct, you would expect scientists and engineers and office-tech specialists to be making the great fortunes, not bankers and corporate managers.

What’s more, you’d expect the same forces – technology, globalization – to produce the same explosion of incomes at the top in similar countries. But other industrial countries, apart from Britain (dominated, like the U.S., by its swollen, parasitic financial sector), have not seen anything like America’s growth in inequality.

It was mistaking skimming for the real work of making things. And we got nowhere:

The grim truth is that the new economy promised by the New Democrats never materialized. Yes, we have the Internet and iPhones, but the gains in productivity that have resulted so far from I.T. have been pretty minor compared to the results of the introduction of the steam engine, electricity and the internal combustion engine.

Yes, you can use Google to shop for items and order them via Amazon.com, but the factories that make them and the ships and the trucks that bring them to you would have seemed familiar to engineers in the 1950s.

The moment when much-hyped alternative energy sources like wind and solar become competitive with fossil fuels and nuclear energy seems to perpetually recede into the future. The all-renewable energy sector is 30 years away – and always will be.

So it does come back to that question from years ago. What is it that we do, exactly?

Well, some of us go to Paris and walk around in the rain. That will have to do.