Choate - Saving capitalism: keeping America strong

P resident Franklin D. Roosevelt not only saved the American economy, he saved market capitalism itself. Seventy-five years later, President Barack Obama now faces the same challenge, but in a far more complex and economically integrated world.

When Roosevelt took office in 1933, a quarter of all American workers were unemployed, nine thousand banks had failed, and $140 billion of depositors money had disappeared. Confronted with a seemingly dead economy, Americans were willing to try just about anything.

In contrast, President Obama has taken charge near the beginning of this economic crisis, not at its low point. Consequently, he must forge solutions at a moment when many Americansincluding a majority of the membership in Congressstill view free-market absolutism as something akin to a secular religion and any deviations from it as that old political demon socialism.

The arithmetic of this economic collapse is staggering. In 2008 and early 2009, the crash wiped out more than 40 percent of the worlds wealth, destroyed more than seven million American jobs, and shrank the U.S. gross domestic product by almost 6 percent. Moreover, the decline in global production closely parallels the decline in the early years of the Great Depression. Economists Barry Eichengreen and Kevin H. ORourke report that since April 2008:

World industrial production continues to track closely the 1930s fall, with no clear signs of turnaround.

German, British, Canadian, and U.S. industrial output are closely matching their respective rates of fall in the 1930s;

Italy and France are doing worse; and

Japans industrial output is experiencing an even worse decline than in the early 1930s.

The existing economic descriptors are inadequate for this crisis. Therefore, this book will identify the current economic crisis as a depression, with a lowercase d.

This depression is neither a normal cyclical downturn nor a traditional finance-driven crash, although the money industry did collapse spectacularly in 2008. Rather, it is something far more fundamental, the economic equivalent of a powerful earthquake caused by shifting tectonic plates deep within the earth. The United States is in the midst of a basic structural shift in the global economy that reaches to the very core of its economic institutions. Where American leaders once believed globalization would lead to the widespread adoption of market capitalism, this depression has brought into focus a different realitythe rise of state capitalism.

State capitalism is the system under which national governments own all the basic natural resources such as oil and natural gas and control or greatly support major industries that produce everything from baby food to spacecraft. Many of these governments also possess multitrillion-dollar sovereign wealth funds, giant pools of public capital that potentially enable them to purchase any corporation or industry in the world, regardless of size, cost, or importance.

While the great economic conflict of the twentieth century was capitalism versus Marxism, the battle in the twenty-first century will be state versus market capitalism. And market capitalism is already losing badly. No private corporation can compete for long against the state-owned and state-operated enterprises of nations such as China or the state-backed corporations of Japan, Korea, Taiwan, or Germany.

The collapse of the tech bubble of the 1990s and the credit and housing bubbles of the early 2000s largely distracted attention from these fundamental structural changes. After these economic mirages broke, the extent of state capitalism became more visible and the consequences more tangible. Foremost of the costs is the deindustrialization of the United States.

Over the past three decades, U.S. corporate leaders responded to this emerging form of competition by monopolizing entire industries and outsourcing production and jobs to places where labor, environmental, and other regulatory costs are lower and profits are higher. In the process, they stripped away much of Americas industrial base, including industries vital to national security.

In response, Americans imported almost $6 trillion more in goods from abroad than they exported from 1981 to 2008. The country paid for those goods by exhausting its savings, selling assets, and assuming massive debt, including from foreign sources. Wall Street became a casino that gambled away Americas wealth. Now our financial system is crippled, and millions of Americans have no savings, no jobs, no credit, and few prospects of recouping their losses.