NYT: Obama’s Inequality Speech

 

What Obama Left Out of His Inequality Speech: Regulation

By Thomas O. McGarty, December 8 2013.

President Obama’s speech on inequality last Wednesday was important in several respects. He identified the threat to economic stability, social cohesion and democratic legitimacy posed by soaring inequality of income and wealth. He put to rest the myths that inequality is mostly a problem afflicting poor minorities, that expanding the economy and reducing inequality are conflicting goals, and that the government cannot do much about the matter.

Mr. Obama also outlined several principles to expand opportunity: strengthening economic productivity and competitiveness; improving education, from prekindergarten to college access to vocational training; empowering workers through collective bargaining and antidiscrimination laws and a higher minimum wage; targeting aid at the communities hardest hit by economic change and the Great Recession; and repairing the social safety net.

But there’s a crucial dimension the president left out: the revival, since the mid-1970s, of the laissez-faire ideology that prevailed in the Gilded Age, roughly the 1870s through the 1910s. It’s no coincidence that this laissez-faire revival — an all-out assault on government regulation — has unfolded over the very period in which inequality has soared to levels not seen since the Gilded Age.

History tells us that in periods when protective governmental institutions are weak, irresponsible companies tend to abuse their economic freedom in ways that harm ordinary workers and consumers. The victims are often less affluent citizens who lack the power either to protect themselves from harm or to hold companies accountable in the courts. We are in such a period today.

The laissez-faire revival of the past 35 years was no accident. The protective statutes and liberal common-law doctrines of the late 1960s and early 1970s — what can be called the Public Interest Era — had a profound impact in such areas as occupational safety and health, environmental protection, consumer finance and the safety of food, drugs and consumer products. This legislative and judicial activism placed far more constraints on the economic freedom of corporate America than had any legal regime preceding it.

It also galvanized a “divert and delay” strategy of resistance by businesses, which lobbied against the new statutes and resisted the efforts of newly empowered regulators and plaintiffs. The laissez-faire revival, however, required more than resistance to change. It also took the determined efforts of a relatively small number of philanthropists and academics to create what I call an “idea infrastructure” around minimalist regulation, popularizing that ideology and persuading Congress, the executive branch, and the courts to scale back constraints on corporations.

Corporate activists — responding in part to a call to action by William E. Simon, a financier and architect of the modern conservative movement, who served as Treasury secretary under Presidents Richard M. Nixon and Gerald R. Ford — devoted tens of millions of dollars to the creation of right-leaning think tanks, media operations and free-enterprise centers in academia, as well as lobbying and public relations firms and “grass-roots” (but actually business-financed) organizations.

The business community launched three frontal assaults on the regulatory agencies that Congress had created over the years to protect the American public.

The first assault came toward the end of Jimmy Carter’s administration, when several newly created agencies were just beginning to hit their stride, and it reached peak intensity during the first three years of Ronald Reagan’s administration, as the Office of Management and Budget slashed agency appropriations requests, a Presidential Task Force on Regulatory Relief asked the industry to recommend rules for repeal, and business-friendly political appointees wrote lax regulations and substituted voluntary compliance programs for tough enforcement.

The second assault came in 1995, after Republicans took control of Congress promising both regulatory reform and tort reform legislation as part of a “Contract With America.” The House of Representatives passed omnibus regulatory reform legislation and radical amendments to the Clean Water Act and the Occupational Safety and Health Act. None of these radical measures, however, survived in the Senate. A backdoor attempt to attach anti-environmental riders to the Environmental Protection Agency’s appropriations bill helped lead to a veto by President Bill Clinton and two government shutdowns before the Republican leadership finally backed down in the face of strong public disapproval. This second assault did, however, result in deep cuts in agency budgets, reduced enforcement, and a noticeable drop in new regulatory protections.

The third assault came with the inauguration of George W. Bush in 2001. With the assistance of the Heritage Foundation, the president filled the top levels of the regulatory agencies with devoted deregulators. Agency budgets, which had begun to creep upward in Mr. Clinton’s second term, were slashed once again, and voluntary compliance became the preferred enforcement tool, despite its demonstrated ineffectiveness. When several deregulatory bills drafted by the Bush administration failed, it sought to achieve its goals administratively. When an agency did try to promulgate a stringent regulation — often because it was required by statute — the regulatory czars in the Office of Management and Budget rewrote the rules to make them weaker or to create generous exemptions.

(Three similar assaults on state common law courts — corresponding to periods when poor investment portfolios forced liability insurance companies to raise rates — resulted in state legislation designed to make it more difficult for victims of negligent medical providers, poorly designed products, and unsafe workplaces to sue for damages in state court or to claim workers’ compensation benefits in state administrative tribunals. Spurred on by the United States Chamber of Commerce and conservative organizations, the business community poured millions of dollars into state judicial elections in the anticipation that business-friendly judges would change the common law rules to be more favorable to defendants.)

The three assaults did not succeed in repealing the bedrock regulatory statutes and common law innovations of the Progressive, New Deal and Public Interest Eras. But they were remarkably successful in disabling the institutions charged with establishing the rules of responsible corporate behavior and with holding irresponsible companies accountable for breaking those rules. By the mid-2000s, those resource-starved federal agencies that had not become thoroughly captured by the industries they regulated were at best reluctant regulators.

Three decades of deregulation and restrictions on legal liability had given companies greater freedom to innovate and expand. But irresponsible companies also had greater freedom to subject their workers to unsafe working conditions, to market predatory loans to desperate borrowers, to sell defective toys and automobiles, to discharge toxic pollutants, to invade the privacy of Internet users, to market unsafe food, drugs and medical devices, and to subject the world economy to systemic risks.

The laissez-faire culture that prevailed in both government and the private sector so deeply discounted risks to workers, consumers, the environment and the financial system that a series of crises was inevitable.

The deadly oil refinery explosion in Texas City, Tex., in 2005, the financial sector meltdown of 2007-8, the Upper Big Branch mine catastrophe in West Virginia and the Deepwater Horizon oil spill, both in 2010, multiple disease outbreaks because of contaminated peanuts, eggs, hamburgers and seafood, and dozens of motor vehicle and toy recalls were just a few of the visible consequences of the laissez-faire mentality that has pervaded the American political economy.

Less visible, but equally devastating, were the heart attacks caused by poorly regulated painkillers, the quiet desperation of millions of “underwater” homeowners who owed more in mortgage debt that their homes were worth, and the subtle but steady and irreversible increase in global temperatures as a result of carbon emissions.

The laissez-faire revival also contributed to the growing disparities in wealth and well-being that became painfully obvious during the last decade. While corporate executives, Wall Street bankers and hedge fund managers greatly benefited from the three waves of assault on regulation, the fortunes of blue-collar workers and the working poor steadily declined. Median incomes have fallen over the last decade.

The disparities brought on by the laissez-faire revival, however, go far beyond the vast disparities in income and wealth. It is of fairly small consequence to the disabled miner whose boss violated federal safety standards that the mining company’s revenues, profits and executive bonuses are on the rise. But the disparity becomes unconscionable when lax pension-protection regulations let the company spin off its “legacy liabilities” (pension and health-insurance guarantees) into an undercapitalized shell for the sole purpose of filing for bankruptcy protection.

Not all of the adverse effects of the laissez-faire revival have fallen disproportionately on the middle class and the poor. Lax regulation of airplanes is as risky for passengers in first and business class as in coach. The rich and poor suffer from the side effects of hastily approved prescription drugs. But the overall burden of deregulation is borne by those least able to carry it.

The chief executive of the giant meat producer does not have to worry about losing a finger or contracting carpal-tunnel syndrome as he attempts to extract more “efficiency” from a poultry processing plant by persuading the Department of Agriculture to allow the company to speed up production lines. The health of few rich people is at risk from the plumes of unregulated toxic emissions that migrate through neighborhoods adjacent to large petrochemical complexes. The affluent tend not to live so close to railroad tracks as to be affected by toxic gases escaping from derailed tank cars.

Wealthy people injured by defective products can afford to hire lawyers to sue the responsible companies. Not so the middle class and the poor, who must rely on attorneys working on a contingency-fee basis. The caps on damages and restrictions on liability that state legislatures have enacted at the behest of big business make it very difficult for potential attorneys to justify taking on many entirely valid claims. Unless they are severely injured and incur enormous medical expenses, ordinary people are effectively deprived of their right to recover damages in court.

The recent confluence of crises undermined the bedrock assumptions of laissez-faire minimalism. The stage was set after the 2008 elections to recapture the spirit of reform that permeated the Progressive, New Deal, and Public Interest Eras and to enact fundamental changes to reduce short-term profit incentives and enhancing the public good. After all, the economy had been nearly destroyed as a direct result of reckless risk-taking by financial institutions, enabled by decades of deregulation.

Unfortunately, far-reaching reforms have not been forthcoming. The business community’s idea infrastructure shifted to defensive mode and — with help from lavish corporate spending to influence elections — beat back the most significant reform proposals of the Obama administration and congressional Democrats, like the suggestion that giant banks be broken up because they are not only too big to fail, but also too big to manage or regulate.

Instead of comprehensive change, Congress settled for patch-and-repair reforms. The Dodd-Frank financial reform act and the Food Safety Modernization Act, both enacted in 2010 while Democrats still controlled both houses of Congress, were, to be sure, important attempts to fix badly broken regulatory programs. But neither statute will bring about fundamental changes in the underlying incentive structures that ultimately determine the behavior of regulated companies and industries. And the agencies charged with implementing those reforms have made only modest progress.

We are now in the midst of a fourth assault on regulation, following the 2010 midterm elections. Having failed to seize the initiative in 2009, the Obama administration has done very little to deflect that assault. Rather than rising to the defense of beleaguered regulatory agencies, the president hosted a closed-door “summit meeting” with 20 chief executives of major corporations, where he promised to work more closely with the business community. He then ordered all regulatory agencies to review all previously issued rules with an eye toward “streamlining” or eliminating as many as possible.

The business community has emerged virtually untouched from a confluence of crises that in previous eras would have resulted in profound redistributional changes. For this surprising development, the idea and influence infrastructures that conservative foundations and corporate America carefully created over a 35-year period can claim much of the credit.

That gets us back to Mr. Obama’s speech last week. While he touched on many of the macroeconomic forces driving the surge in inequality since the 1970s — skill-biased technological change, the dismantling of American manufacturing, the globalization of commerce and finance, and a “trickle-down” ideology of tax cuts for the rich — he barely mentioned regulation.

In fact, in a speech of some 6,500 words, he mentioned regulation exactly twice: once to note the contribution of “lax regulation” to financial turmoil, and the second time to argue that expanding the economic pie calls for “streamlining regulations that are outdated or unnecessary or too costly.”

We cannot know for certain whether Mr. Obama’s hesitancy to embrace robust regulation results from his own blind spots — which resemble those of his Democratic predecessors Mr. Carter and Mr. Clinton — or from a calculation that a more progressive tax system, investments in education and defending the social safety net (and his embattled health care reform) are so politically daunting that anything that might further antagonize corporate executives should be put off for another day. Most likely, it’s a combination of both.

But Mr. Obama’s failure to examine (or even mention) the laissez-faire revival was a missed opportunity. Deregulation may not be the central cause of the soaring inequality of recent decades, but it has certainly magnified its consequences, making it ever more difficult for workers and consumers to resist the rapacious predations of abusive employers and companies. The weakening of what used to be the great American middle class cannot be understood without also considering the embrace of free-market theology. By omitting this critical factor in the rise of inequality, Mr. Obama left unchallenged the argument, recited by business like a mantra, that regulation and economic expansion are inherently in tension.

Sadly, the crises resulting from deregulation will almost certainly continue until political forces realign themselves and a new social bargain is struck under which the business community’s economic freedoms are once again constrained by a government that is more willing to impose greater responsibilities on powerful economic actors and a legal system that is capable of holding them accountable for the harm that they cause. Until then, a crucial check on the seemingly inexorable advance of economic inequality will be missing.

See Thomas O. McGarty, What Obama Left Out of His Inequality Speech: Regulation, New York Times, December 8 2013.

(Emphasis added)