YouTube video

James K. Galbraith: The Bush years – Growth demanded new markets among debtors who previously had not qualified for mortgages

Story Transcript

PAUL JAY, SENIOR EDITOR, TRNN: Welcome back to The Real News Network. I’m Paul Jay in Washington.

In the new book by Professor James K. Galbraith, Inequality and Instability, he writes the following:

“The problem facing the incoming administration of George W. Bush in January 2001 was thus twofold. Externally, there was little scope remaining for extracting capital from the rest of the world. Every region that was open to crisis, with the possible exceptions of China and India, had already have one. What to do?”

A little further on, he writes:

“A remaining option was to foster the growth of demand by the world’s one remaining solvent class: American households. Growth on the scale required demanded new markets, and these were to be found only among debtors who had not previously qualified for mortgage loans.”

Now joining us to talk further about his book—and I say further, ’cause if you haven’t watched part one of the interview, you should, and then come back and watch part two—is James K. Galbraith. Professor Galbraith teaches economics at the LBJ School of Public Affairs at the University of Texas Austin. He’s the author of the book The Predator State. And as I mentioned, we’re talking about his latest book, Inequality and Instability. Thanks for joining us again, James.


JAY: So pick up the story. President Bush comes to power. And what happens next?

GALBRAITH: George W. Bush became president at a moment when a recession was already basically underway as a result of the collapse of the tech sector, the NASDAQ, in the spring of 2000, and faced a problem of how to meet expectations for economic growth, how to reduce the scope of those events. And of course there were multiple strands in the strategy. The tax cuts played a role in the early part of the Bush administration. After the 9/11 attacks, interest rates were reduced and consumers were encouraged to go out and buy on credit. And later on in the decade, military spending grew very rapidly, and particularly at the start of the Iraq War. But all of those things were not going to be sufficient to bring about a strong return of economic growth or return to high employment.

JAY: I thought there was a very interesting point in your book where you talked about how the military expenditure on the Afghan/Iraq wars, it created some stimulus, but most mostly in the Washington area, and it didn’t really have a national affect the way, you know, this kind of military spending might have been expected to.

GALBRAITH: Well, it had a disproportionate effect on the counties just outside of Washington, yes, no question about that. Just as the previous round of expansion had affected a small number of counties in California, Washington state, in the Bush administration it was the places that are most strongly affected by military activity.

JAY: So you say that sort of the capital that could be, you know, relatively easily extracted or extracted internationally had kind of reached a point that there wasn’t a lot more to squeeze at that point, so now you’re going to have to find ways to do it domestically. So what do they do?

GALBRAITH: This time you began to see, on top of the deregulation that had already occurred, an aggressive de-supervision of the financial sector. And there were a number of very specific things that happened. Right after September 11, 500 FBI agents who had been working on financial fraud were shifted to counterterrorism, which was understandable, but they were never replaced. So that functionality, that capability was sharply reduced. In 2003, the head of the Office of Thrift Supervision sent a very clear signal, a famous signal to the industry about enforcement of underwriting standards by holding a press conference that featured a stack of federal regulations and a chainsaw. And you had industry-friendly people who were appointed to run practically all of the financial regulatory institutions, and at the Federal Reserve, Alan Greenspan, who was, notoriously, philosophically opposed to effective federal supervision of the banking sector.

So all of this led to an environment in which there could be a very rapid growth of lending to households who were very questionable borrowers and where those originating the loans, the mortgages, knew that they were dealing with borrowers who would either have to renegotiate their loans after a few years or would very likely default. So you had, essentially, money flowing into the economy in a way which was practically certain to come back and bite the economy after a few years had passed. And that was the fundamental phenomenon that led to the financial meltdown that began in 2007.

JAY: So the drive of finance to create more debt as a way of, primarily, making money, as opposed to more investment in the productive economy, why is that? Why is there this—they’re more interested in creating this whole mortgage shenanigan than putting all this investment capital into some kind of real-economy investment?

GALBRAITH: Well, I think financiers take their opportunities where they find them. And part of the job of the public sector is to restrict the range of those opportunities to purposes that are consonant with the larger well-being of the country, with the public good. And what happened in this period was that that perspective, that function of regulation basically disappeared. It was simply relaxed, and, again, for two purposes. One was, as I’ve said, because you got an illusion of—well, you got growth and the illusion of prosperity as result of the issuance of all of this debt, and the economy continued to expand longer than it would otherwise have. And the other is that you were dealing with the political allies of the incumbent administration, and they were [incompr.] their friends were put into office and their support was fundamental to the power base of that particular government. So the two things are working together, economic and political objectives, in a very complementary way.

JAY: Now, one of the underlying themes of this period, even in the ’90s, but particularly after 2000, is that the reason American workers’ wages are relatively stagnant and not growing with this rise in productivity and these bubbles as much as people would have thought, the reason for that, we’re told, is global competition for wages, that the globalization is really driving down U.S. wages and there’s not much we can do about it. But you argue with that idea in the book. What is your point there?

GALBRAITH: A couple of things. One is that when one looks at the scale of the manufacturing sector, what remains of the manufacturing sector in the United States, it’s fairly small, and it’s fairly hard to see how a shift of jobs is going to make a dramatic effect on the large body of the American working population that is just simply no longer in manufacturing at all. Most Americans work in what we call the services sectors, and they are not in jobs that are going to be outsourced, because they have to be done inside the country.

And a second proposition has to do with the changing structure of the American workforce. As it becomes younger, as it becomes more minority, as it becomes more female, as it becomes—as immigrants take a larger share of the jobs, then what is going to happen is that this concept that we call the median, the middle worker, shifts in the direction of a lower-paid employee in any event. And the share of, let’s say, older white males in the U.S. working population dropped dramatically after the early 1980s, while the shares of women, the share of minorities, the share of immigrants all rose. So that’s a phenomenon which I think needs to be incorporated in our understanding of why this overall measure that we call the median wage has stayed flat for so long.

JAY: And you point that—you say in your book—I’ll quote it:

“In the study of global inequality, trends and common patterns emerge with great clarity and persistence. This fact alone proves the dominant forces affecting the distribution of pay (and therefore incomes) worldwide are systematic and macroeconomic.”

What you mean by that?

GALBRAITH: One of the things that we did that had not been done before was to build basically a worldwide set of measures of economic inequality. And we used data sets which had been available for a long time and of very good quality, but which had never been adapted to this particular purpose. And so this was something that teams of graduate students could achieve. And then you look at the data and you look across all the countries of the world for which we have information, and you ask: are they, movements of inequality, going in various different directions according to national policy? Or is there a common pattern? And the answer to the question is very clear. There is a very strong common pattern. It actually has, let’s say, four major elements. In the 1960s the trend is relatively flat and there is divergence—diversity of movements. In the 1970s, inequality tends to decline, and that reflects the rise in commodity prices, low interest rates, rapid growth of debt, all across the developing world. Beginning in 1980 and for 20 years, there’s a massive increase in inequality, and that is the dominant movement in the data. And it reflects the rise in interest rates, the debt crisis, and the political changes that occurred during those 20 years. And it peaks out in 2000-2001.

JAY: And—just to jump in a bit—and while for some American workers—ordinary people may have—benefit to some extent for this, for poor people in America, but particularly outside America, in Latin America and other places, it was a disaster.

GALBRAITH: What we did in the 1980s was to export a great deal of the adjustment, a great deal of the suffering, to other countries of the world, and particularly at first to Latin America and Africa, countries which had become highly indebted and which were highly dependent upon high commodity prices. And their interest rates went up, and their export prices collapsed, and they were in very deep trouble for 20 years. And so you had massive problems, you had massive poverty, you had in some places depopulation, as a result of the stress that the forces in the world economy put on these countries.

JAY: And you say in the book these were willed policies. This stuff didn’t just happen.

GALBRAITH: No, they certainly were deliberate policies. I think the policies were constructed primarily with a view toward their effects in the United States. There was in the early ’80s a strong effort to break American labor unions. But the consequences of this were felt internationally perhaps even more strongly than they were felt at home.

JAY: And a massive transfer of wealth, when interest rates were hitting 19, 20 percent, from Latin America up to American banks.

GALBRAITH: For a short period of time, a massive transfer of wealth, until it became impossible to pay. And then what you had was a generalized depression.

JAY: So you have a situation where finance, relatively unfettered, has a period of sort of bubble after bubble; looks like glory days; certain amount of that does trickle down; as you point out the book, completely unsustainable, which leads to the crisis of 2008. And your data, it seems to show (in our next segment we’ll talk about this) that countries with economies with less inequality have less instability. So we’re going to talk about that in the next segment of our interview with James K. Galbraith on The Real News Network. Thanks for joining us, James.

GALBRAITH: Thank you.

JAY: Thank you for joining us. And we’ll be back soon.


DISCLAIMER: Please note that transcripts for The Real News Network are typed from a recording of the program. TRNN cannot guarantee their complete accuracy.

Creative Commons License

Republish our articles for free, online or in print, under a Creative Commons license.

James K. Galbraith teaches at the LBJ School of Public Affairs, The University of Texas at Austin. He is a Senior Scholar of the Levy Economics Institute and the Chair of the Board of Economists for Peace and Security. The son of a renowned economist, the late John Kenneth Galbraith, he writes occasional commentary for many publications, including Mother Jones, The Texas Observer, The American Prospect, and The Nation. He directs the University of Texas Inequality Project, an informal research group based at the LBJ School, and is President this year of the Association for Evolutionary Economics.