Greater Lawlessness Causes Great Recessions

Popular Economics Weekly

We know Greg Smith’s unveiling of Goldman Sachs’ ‘culture’ of GS profits ahead of clients’ interests was nothing new. And that real laws were broken—from conflicts of interest to outright fraud. The 2010 congressional hearings unveiled much of the double dealing that was rationalized by Goldman Sachs’ buyer-beware code—its clients should be sophisticated enough to know that Goldman would try to maximize its own profits, before its clients’ profits.

But other laws were broken; as well as economic rules that govern sound business practices in the runup to the Great Recession. Pundits have traced the decline of Wall Street ethics from the morphing of partnership-owned investment banks to corporations, as well as the enormous growth of financial markets that bred outright greed.

But there is little mention of how it caused our economic decline into the Great Recession. What was behind this culture of greed and unethical behavior; a culture of greater lawlessness can be traced back to the early 1980s when President Ronald Reagan trumpeted that government was the problem and more private enterprise the solution for greater prosperity.

In attempting to downgrade governmental powers, conservative regimes in particular began to consciously disregard the laws of our land—from not enforcing existing regulations, to Iran-contra gun-running in President Reagan’s case, to abrogating international treaties such as START nuclear non-proliferation, and muzzling Department of Justice Attorneys General under GW Bush, to name just a few cases.

The number of convicted criminals in those administrations tells part of the story. President Reagan’s administration was marked by multiple scandals, resulting in the investigation, indictment, or conviction of over 138 administration officials, the largest number for any U.S. President.

And Salon.com had documented 34 incidents of law-breaking in just the first 4 years of GW Bush’s Presidency, the most blatant being unmasking covert CIA operative Valerie Plame, and its fabricated claims that Iraq had weapons of mass destruction.

But even more damage was done via blatantly disregarded economic laws of successive Republican administrations. It was really the attempt by Big Business to unravel the economic safeguards of the New Deal, first spelled out in Paul Krugman’s The Great Unraveling, by advocating massive budget deficits to pay for a Pax Americana—with especially severe consequences for the old and poor.

“Deficits don’t matter” was the infamous chant of Bush VP Dick Cheney. At a time when economic inequality had risen to levels last seen in the 1920s, these administrations wanted to divert attention from a vanishing social safety net by proposing the ago-old Darwinian solution—the free market. For only the fittest will survive in a world that is ruled by self-interest, rather than laws and regulations.

The United States, beginning in the 1980s once again became the most ardent advocate and practitioner of the oldest form of capitalism, now a primitive relic of 18^th century enlightenment. This is but one part of our aging democracy that U.S. hegemonists put up as the model for western civilization. But it is a very imperfect model for the rest of the world as well.

A 2002 survey of 38,000 people in 44 countries by the Pew Center for the People and the Press found what they think of our American Way. “Since 2000, favorability ratings for the U.S. have fallen in 19 of the 27 countries where trend benchmarks are available…pluralities in most of the nations surveyed complain about American unilateralism,” says the study. They think we disregard their interests in pursuit of our own self-interest.

Few dispute that our capitalistic economic system has won the day. It produces great wealth, particularly for those at the top of the wealth pyramid. Robert Reich’s book, “The Future of Success” said it best: “By the end of the (20th) century, the richest 1 percent of American families, comprising 2.7 million people, had as many dollars to spend after taxes as the bottom 100 million.”

But not for the 99 percent majority, in other words. Why so much greed, and willful lawlessness? This last happened in the 1920s run up to the Great Depression. Fear overruled both laws and common sense, so that the lobbyists of self-interest came to the fore. Our economy was being transformed from a rural to industrial economy, which drove workers into the cities. Wages plunged along with prices, and so did economic activity for more than 10 years. It was only the New Deal that brought benefits to the larger majority of citizens and leveled the economic playing field.

The same has happened today. Conservatives are again ignoring basic economic  truths in their attempt to destroy our working class as we know it, by passing laws that ban collective bargaining in states like Wisconsin, or right to work laws that say workers do not have to pay union dues even though they derive the benefits from belonging to a union. We know the results in Wisconsin after one year. Employment has plunged and is the worst of the Midwest states that surround it, according to the Economic Policy Institute.

Graph: EPI

It is no coincidence that those 23 states that have passed right to work laws are also the poorest states, with the highest income inequality, lowest educational achievement, and receive the most in public subsidies. Taking incomes and wealth away from workers in those states can only make them poorer in relation to other states and regions, and a continuing drain on public finances.

That is the real lesson of our greater lawlessness. By choosing to break laws and regulations that govern economic activity, economic activity is being pushed back to levels of past centuries. For workers will only have the incentive to produce more and better products and services when they have the incentive to do so.

In the end, such greater lawlessness means a disregard for everyone but one’s own clan or tribe, a greater selfishness, and no country can survive such a breakdown in social welfare. That is the lesson learned from the Great Recession. Policies that ignore economic as well as civil laws, that continue to divert incomes and wealth to the wealthiest, impoverish the majority.

Harlan Green © 2012