Don't forget how we got to this place

President Barack Obama did a fine job with his first State of the Union address. His basic theses were: The middle class is suffering. We must create more jobs. Banks have to pay more. Democrats and Republicans should get along. Nice. But to reignite a constituency for a progressive vision, Obama should be talking in broader strokes. He needs to articulate the historical arc of how we came to be living under today's economic conditions.

Americans know that social mobility has virtually flatlined, with average male workers in their 30s doing worse than their fathers' generation. People are just trying to keep their heads above the surf, even as forces are tugging from below. What are those forces, why do they exist and how can they be counteracted? This is what Obama needs to be talking about.

Growing prosperity has been eluding America's middle class for more than a generation because government no longer demands that capitalism behave itself. Intriguingly this has to do with the Cold War ending.

Stick with me for the connection, and for a fuller explication read John Lanchester's blistering and illuminating new book on the financial meltdown I.O.U.: Why Everyone Owes Everyone and No One Can Pay.

Lanchester posits that capitalism won the worldwide beauty contest with communism and then no longer had to keep up appearances.

Through much of the 20th century each system was competing to demonstrate that it offered their citizens a better way of life. Western democracies did so by ensuring that the new wealth created by a dynamic market economy was equitably shared.

In post-World War II America, as worker productivity rose so did real wages. It wasn't until the 1970s — greatly picking up speed during Ronald Reagan's presidency — that the two started to diverge, with workers left behind.

When the Soviet Union claimed that soulless capitalists cared nothing for workers, the West responded by expanding labor rights and adopting policies that allowed unions to act as a counterweight to capitalist impulses. As Lanchester puts it, "the jet engine of capitalism was harnessed to the oxcart of social justice." The result was that Western democracies provided the best possible lives for ordinary people.

But once capitalism vanquished its enemy, there was less political value in workers being treated fairly, which allowed America's financial oligarchy to essentially run amok. It was a vicious cycle — at least as far as average Americans are concerned — where the wealthy donor class wielded outsized political influence leading to the rewriting of tax and regulatory rules that led to even bigger paydays for capital and the marginalization of workers.

Suddenly, capital gains were being taxed at a lower rate than wages, trade agreements were written to allow capital to flow wherever workers were cheapest, laws against union-busting were barely enforced and sensible limits on the riskiness of the financial sector such as the Glass-Steagall Act were repealed.

Our nation got richer, but average workers didn't. Instead, Americans lost their jobs as capital moved to places like Cambodia where apparel workers for U.S. name brands are paid about 33 cents per hour — not even close to a living wage there. Politicians greeted this dislocation and exploitation with "can't stop progress." No longer did they need to show the world that capitalism had a heart.

The donor class loved it — almost to death, as we saw in September 2008 when the meltdown hit, after which taxpayers saved the day.

That's how we got here.

As to how we move forward, our counterpoise of Soviet-style totalitarian communism isn't likely to rise again, and no one would want it to. Chinese totalitarian capitalism is bad enough. Which means to get capitalism to behave will take government sua sponte imposing tough regulatory controls, taxing more progressively, empowering workers and strengthening social safety nets.

Obama's broader national agenda will only succeed if the populace appreciates how 30 years of deliberate government policy brought us to current economic conditions, and that a structural rebalancing of the relative power of capital and labor is needed. He has yet to make that connection.

Don't forget how we got to this place 01/30/10 [Last modified: Saturday, January 30, 2010 3:30am]

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