Of the 14 books Kevin Phillips has published in the past 40 years, none has proved more timely than Bad Money. Released in April 2008, Phillips’ worried and withering critique of the financialization of the U.S. economy arrived just a few months before the bubble years came crashing to a halt. In the paperback edition released last month, he adds another 90 or so pages to update the story.
Best known as a Republican strategist during the first half of his career–his first book, The Emerging Republican Majority (1969), correctly foretold the wholesale electoral realignment that occurred in the generation following the civil rights era, which split the South away from its historical ties to the Democrats–Phillips became a critic of his old party, and of the growing concentration of wealth and power in America, round about the time of Bush I. Following The Politics of Rich and Poor in 1990, he spent much of the next decade-plus studying and writing about related problems in Boiling Point (1993), Arrogant Capital (1994) and Wealth and Democracy (2002).
Bad Money is the capstone of a triptych of books by Phillips about the folly, excess and simmering contradictions of the Bush II years. Both of the earlier volumes–American Dynasty (2004) and American Theocracy (2006)–remain essential companions to Bad Money; many of the arguments brought to bear in the latest book are developed in more historical detail there, especially in American Theocracy.
I spoke to Phillips late last week about the Obama administration, the economy, Republican oppositionalism, and the future of U.S.-style financial capitalism.
SP: Let me start by asking you about the Obama administration’s handling of the financial crisis. You’ve called it an attempt to reinflate the bubble.
Kevin Phillips: Well, I was talking about [Fed chair Ben] Bernanke rebubbling. You can’t, strictly speaking, blame Obama for Bernanke. I think you can say he should be a little troubled by Bernanke. And maybe he should say something about that. But the rebubbling is Bernanke.
As far as what Obama wants to do, the problem I have with that is he’s essentially just trying to put band-aids and give transfusions to banks that have gangrene. You have to face up to the fact that you’ve got a sick financial system in a different sense than Wall Street says. Wall Street says, oh, it’s just a couple of thousand tons of pieces of paper and contracts and so forth. But in essence what you have is 25 years in which the bubble represented by massively expanding debt and massively expanding Wall Street ambitions and a massively expanding Wall Street share of gross domestic product have created this mess. And I don’t see Obama facing up to the mess. But I wouldn’t blame him as yet for Bernanke.
SP: The April 15 tax protest parties around the country illustrated the degree of popular anger over these endless bailouts. Yet with the exception of a sizeable coterie of progressive economists, liberals and the left have seemed remarkably silent on the plunder of public moneys to save financial giants. The partisan political reasons for this are obvious enough, but isn’t it dangerous for them to cede the whole matter of public outrage to the right?
Phillips: I think it’s very dangerous. You know, the flipside was there when the percentage of conservatives of the free market based in the Republican party ceded the attack on everything from tax cuts for the rich to bailouts to deregulation. They went along with it; they let the Bush people do all that. And then they wondered why they didn’t have as much credibility. They got some of it back by opposing the bailouts in September and October.
I think the challenge on the progressive side is going to be, those 70 or 80 or however many Democrats and the people who think like them in the Senate are going to have to start standing up. Otherwise they’re going to pay, just as the free-market Republicans had to pay, for rolling over for the White House.
SP: There are lot of people who think that Obama’s prospects, not only in terms of economic recovery but his re-election chances, are being effectively decided in the first year of his term. Is that a hasty judgment?
Phillips: It’s probably too hasty if you go by history. History suggests that presidents can shake up their approach in the second or even third years based on events or galvanizing circumstances that cause them to rejudge things. I would that in the type of economic situation that we’re in, you have to put a big asterisk on the history, saying that so much of what he does in the economy is going to be influenced if not decided by the extent to which he swims along in the current of water that the Bush administration did with [former Treasury Secretary Hank] Paulson and Bernanke. And [current Treasury Secretary Tim] Geithner–Geithner, for all practical purposes, is a holdover.
So it may be that he doesn’t have the usual historical wiggle room, and that more of his fate is being decided in the first six or eight months than history would suggest or really is fair. Now, having said that, I think he understood when he came to office what a rotten kettle of fish he had in the financial system. He was expressing, if you go back and look at his comments, dire concern. And then Bill Clinton, mister butter them up and do whatever you’re going to do to them, basically said you’ve got to be more upbeat, you’ve got to be more expansive. So they shifted toward being more upbeat and expansive. I think Clinton probably had some point. Obama was giving these dire pronouncements without explaining the reason to be dire. I don’t think you can do that.
But Clinton was wrong in thinking the country is ready for another greasy mayonnaise jar from his perspective. He’s the man who was in the office when the bubble broke in 2000. He’s always tried to peddle how strong the economy was when he left it, which just wasn’t true at all. You had [former Treasury Secretary] Bob Rubin, and Geithner was in there, and Larry Summers–some of the crowd that is giving advice to Obama straight from the Clinton era. And I guess my views on Clinton would be more negative than those of the typical Democrat, or even the typical independent. But I don’t think there’s much about Clinton that anybody should want to be imitating. In that sense, I just have this concern that Obama may have let more of this be decided too quickly than he can afford.
I would say he’s got himself until the autumn. I think [he could help himself] if he takes a tougher stand in the autumn and basically says we just can’t go along in this pathway that he inherited and he’s sorry he didn’t decide to bite the bullet more, but a lot of the counsel he was getting sort of told him to slap a band-aid on the wound and say it was healing.
SP: Why do you think he went back to the well, almost categorically, for those Clinton-era economic people?
Phillips: I think it’s very hard to do. The two-party system is a trap for almost anything. If you take office and you represent the people who’ve been out of power for eight years, you find that the interest groups within your party structure, be it Democrat or Republican, have taken away a lot of the maneuvering room you might have thought you had.
Now, if you were FDR, elected by a 17 or 18-point margin over Hoover in 1932, you would have a lot of personal running room. In my opinion, Obama does not really have that. And therefore, if he’s suckered by the Clintonians early on, it may be more of a lasting problem. But I can understand how he was [suckered]. The Democratic party is now the party that gets the bulk of the financial sector contributions and has as its major states the exact same ones–New York, Pennsylvania, Massachusetts, Illinois, California–where the principal concentrations of capital and money management are.
SP: To go back to the April 15 protests again, what do you make of the conservative media echo chamber and people like Texas Gov. Rick Perry invoking the specter of secession?
Phillips: I don’t take him seriously. He’s from some family in Texas that had too much money relative to their thought process. Okay, it’s an interesting joke–if you’re from Texas or Alaska, you can secede. But I don’t think it’s out there as much of a challenge. The sense that conservatives have that they’re better off opposing the administration and gambling that Obama’s going to go wrong on the economy is, I think, not a foolish gamble on their part. I don’t think they stand for very much anymore. Even the ones who are most overtly free market honor it in the breach, the same way that a lot of progressives honor progressivism in the breach when party loyalty tells them to support something.
I don’t think the Republicans stand for much of anything, so maybe they’re better off defining themselves as against. That’s one thing the Republicans are better at than some. The Democrats did not do a very good job of defining themselves against George W. until the opportunity was practically tattooed on their eyeballs. Sometimes defining yourself against what’s in power is effective. And I think the Republicans, because the House crowd voted against the bailout, have figured that this is an opportunity.
And if they got in, I don’t know what they’d do about it. Probably make it worse. But the point is, they’re going to be somewhat credible on opposing it, and I think that their gambling on this is not poor politics.
SP: What I really meant to ask about is the energies that these sorts of folks are unleashing, and where they may go. There’s been an uproar this week over a Homeland Security report that highlights the possibility of homegrown right-wing terrorism in the U.S. Does that strike you as a reasonable fear in this climate?
Phillips: I don’t think it’s too reasonable a fear. Obama’s personal popularity has held up pretty well. I think it’s very disconcerting to see him hitching it to Wall Street’s caboose. The whole notion that you can blame unhappiness with a national administration–at this point in time in this country, with a botched economy–thinking you can blame that on right-wing terrorism, that’s sort of like Hillary’s “vast right-wing conspiracy.”
I’m sure some of them would like to conspire, but frankly any experience I’ve ever had with them–if they conspired to achieve something, it’d probably be just the opposite result. The likelihood that they’re going to conspire to orchestrate something successful is, I don’t think, too high. So maybe that’s out there, but I think it would be out there with any president. Especially any president that sees ordinary people out there in trouble and lets himself go with the economics of a Geithner, Larry Summers and Ben Bernanke triangle.
SP: All sorts of critics have taken this crisis as a damning comment on US-style financial capitalism–and, as you have written, the extent to which that sector has grown. But we’re seeing an integrated collapse of the world’s industrial and emerging economies, and I’m wondering whether you think this is also a rebuke to economic globalism as well. At a very basic level, globalization as it’s been practiced up to now seems like a violation of the principle of diversity in nature as the key to survival and robustness of species.
Phillips: Well, I sort of agree with that analysis. I wouldn’t do the species aspect, because the other version of the species [analogy] is social and economic Darwinism. That’s probably not a good thing to bring into economic discussions.
However, having said that, I think that the globalization that has prevailed in the economy, say, for the last 50 or 60 years and has been very heavily promoted not by manufacturing, which was gurgling down the drain in this country, but by finance, is going to suffer with the discrediting of finance–as the same thing happened in the discrediting of British finance after the whole British world started coming unglued in World War I and then in World War II completely.
That globalization era vanished as the British hegemon declined, and I think the globalization era that we’ve been in is going to take a major hit as the U.S. declines. And especially as speculative capitalism, as opposed to a more state-friendly capitalism of the sort [practiced] in Asia and continental Europe, [declines]. I think that the continental European and Asian modified capitalisms are going to dance on–I won’t say the grave, but the discomfort, of the speculative capitalism that has been headquartered in the English-speaking countries.
I mean, London is just as guilty, on a slightly smaller scale, as New York. And the attitudes are such that even in the British conservative party–since they’re out of power, they’re talking about re-establishing something there that’s the equivalent of what Glass-Steagall used to be in the United States. So the sense even from elements of conservatism that speculative capitalism has run amok, I think, is pretty strong. And the United States is going to pay for it.
SP: What will that cost look like in terms of the domestic economy that we face going forward?
Phillips: I would say we’ll probably have fairly low-growth economics over the next five to 10 years. There will probably be some spurts of something that looks better, but I totally distrust the government economic numbers. Some of Obama’s people criticized them before they were in power. But now that they’re in power, nobody wants to get rid of the sort of fake, benign [statistics]. Somebody called it “Pollyanna creep,” and I think that’s a very good description. It’s going to be very hard to figure out how bad things are when the United States over any length of time until they decide there’s going to be more integrity in the government economic statistics. There’s a columnist in Barron’s who keeps saying that GDP would better be described as “gross domestic pap.” I think there’s a lot to be said for that. There’s a lot of fakery in there.
I think we’ll have relatively low growth. I think inflation will be higher than the government will ever admit. We’re baking some of that into the cake now, and to the extent that those things are happening, I think we will have, as a concomitant of higher-than-acknowledged and higher-than-hoped inflation, a further decline of the dollar. And the further decline of the dollar will push up natural resource prices again, which I think have been pushed down too much by speculation just as they were pushed up too much by speculation earlier. And that’s probably going to be another negative gift of the speculative economy as we see things return to something a bit more normal–it’s likely to involve a higher price pattern than people would like, and a much bigger debt burden, and a weak currency and slow growth.
That’s probably the downside. It’s a bit like the 1970s.
SP: You talk at length in the new afterword to Bad Money about inflation and about a possible commodity price revolution spurred by the emergence of Asia. Can you explain briefly what a commodity cycle is and why you think we’re in one?
Phillips: Well, there are regular commodity cycles that people in the commodities business–a number of them subscribe to the theory, and they all identify commodity cycles as periods when the commodity prices go up for a sustained period of time, which is usually at a minimum five to seven years and often considerably more. Maybe two decades.
Then there are what I would call, when you look back historically, certain times that have produced what economists call a macro-cycle, a larger cycle. When it happened in Europe back in the 16th and early 17th centuries, it was called the price revolution. Essentially prices went up 300 to 400 percent over a period of–people disagree, but say 50 to 70 years. I think there’s a very good chance that people looking back in 2030 will record that the period of 65 years beginning in 1965 will have been a price revolution related to the emergence of Asia.
The emergence of Asia has been a very notable force, not only in the wars the United States has had to fight–they were all Asian–but the key natural resource price, energy price–oil–and then the shift of wealth to Asia, which gives them leverage over a fair amount of our economics, I think it’s very likely to assume you’re going to see an economic realignment based on Asia. My assumption, and I think the odds are probably about two to one, is that the price revolution beginning in 1965 and probably lasting until 2025 or 2030 will be linked to Asia and will involve a period in this country from 1965-1981, and then significantly rising prices again from 2002 or 2003 until some point in the 2020s.
The average inflation during the 1980s and 1990s, I guess, works out to about 2 or 3 percent, but I have some arguments in the book about the absolute non-reliability, to use a charitable word, of U.S. government statistics. I think they made it into this creeping Pollyanna-ism because they’d be embarrassing, and to cover up weaknesses in the economy.
SP: Thanks to concepts like substitution and hedonics in the calculation of the stats, you mean.
Phillips: Oh, and one of my favorites is the birth and death of businesses adjustment to the GDP. That involves the government’s theories over the relative change in the number of businesses created versus those destroyed. In the GDP, they also have imputed income. Imputed income, for example, includes the imputed income of people who own homes relative to the rent they would have paid.
It’s a difficult set of things to explain, so you almost never an across-the-board evaluation. But if you put one of them on the front page of the New York Times with about 2500 to 3000 words of explanation as to what’s in all of these things, I think you’d really start something.