Today's date:
Fall 2008

Saving Globalization From the Republicans

Robert Reich, US secretary of labor under President Bill Clinton, is an adviser to Barack Obama. His most recent book is Supercapitalism. He spoke with NPQ in the summer.

NPQ | Now FNMA (the Federal National Mortgage Association)—one of the pillars of the post-depression American economic order—has been taken over by the government. What does this say about the depth of the United States economic crisis resulting from the housing bubble?

Robert Reich | The crisis is worse than most economists assumed, and it all goes back to the early years of this decade when real interest rates were below zero. When real interest rates are less than zero, it’s crazy not to borrow, and that’s what everyone did—not only homeowners getting mortgages but every financial institution and millions of investors.

NPQ | Nobel laureate in economics Ed Phelps says the current financial crisis has given capitalism a “black eye.” It turns out that the neo-liberal model that says capitalism is self-correcting is wrong. Is the US headed back toward New Deal-type regulation after the long embrace of ever-freer markets?

Reich | Capitalism is not self-correcting. It has never been. Capitalism has always required regulation in order to ensure against fraud and excessive speculation, especially when money is so cheap. Alan Greenspan, the former Federal Reserve chief, allowed the current crisis to happen because he did, indeed, believe that capitalism was self-correcting.

George W. Bush and others in the Bush administration have also assumed, wrongly, that regulation is unnecessary. Time and again, we’ve learned that markets don’t work without regulation.

At bottom, markets depend on trust. But trust doesn’t happen automatically, simply because individual players in the market often can get away with behavior that breeds distrust. They don’t bear the full cost of imposing fraud or excessive speculation on others. The cost is spread over all players. This is what we’re now witnessing. Because of the excesses of the last few years, lenders and investors no longer trust that the people with whom they’re dealing will fulfill their commitments. As a result, credit is drying up.

NPQ | No matter how much Barack Obama hews to the center in the campaign, won’t he be forced by social circumstances, if President, to pursue government intervention of a kind unseen—in terms of re-regulation, if not new institutions—since the Great Depression? What kind of intervention do you deem necessary?

Reich | Obama is a pragmatist. He’ll do what’s necessary, and no more. We need smart regulation of financial markets, including mortgages and consumer credit, and many such regulations will need to be international because financial markets are now global.

NPQ | Obamania has not hit Asia, which tends to be more focused on interests than values, as much as it has Europe. In general, Japan, China and the rest prefer Republicans and free trade. They fear protectionism from Democrats.

Reich | They’re wrong to fear protectionism. Democrats have led the way to internationalism and global trade—starting with the Kennedy Round in the 1960s and continuing through NAFTA and China’s entry into the World Trade Organization under Clinton.

Backlashes against globalism occur under Republicans, as they did under Herbert Hoover in the early 1930s and now under George W. Bush. The reason is simple. America’s huge middle class doesn’t do as well under Republicans. Their jobs are more threatened. As a result, they fear trade and other global commitments.

Under Democratic administrations, on the other hand, the middle class does better —their wages rise, their jobs are more stable. As a result, they’re more willing to embrace the advantages of trade and globalization. I expect the same pattern to hold under an Obama administration.

Universal health care, relief for those who can’t pay their mortgages or can’t afford college tuition, investments in infrastructure and in education—all these, which Obama will champion, make Americans more willing to accept the changes that globalization inevitably brings.

Without these sources of security, Americans fear change. Right now, the largest percentage of Americans since the 1960s are against further trade-opening agreements. Why? Largely because they’ve done so badly under George W. Bush. The median wage, adjusted for inflation, is lower than it was when Bush came to office.