More on the Gutting of the American Car Industry

The gutting of the US auto industry is a negative development for the economy, the consequences of which have not, I believe, been fully thought through.  And the contrast between the treatment of banks and the auto industry gets to the crux of what underlies at a very deep level our current economic malaise and long term prospects for recovery.

Further on this subject, the cover article in the current Harper's by Thomas Geoghegan, a Chicago lawyer, explores how both the financial and manufacturing crisis stem from a single cause, the elimination of contract rights and usury caps protecting people in recent years that have seen credit card rates jump from a few percent to 30% or more. Usury or excessively high interest rates, Geoghan points out, is something that societies have regulated since Biblical days for good reason.  Sky high interest rates simultaneously impoverish those at the bottom while monopolizing capital at the top in the pursuit of huge but inevitably unsustainable profits.  Echoing Kevin Phillips argument that  declining societies turn to finance as the only way to support--if temporarily--excessive consumption, Geoghan describes how the prospect of absurdly high returns siphoned capital from productive sectors leaving us doubly impoverished.  He writes:

Some people still think our financial collapse was the result of a technical glitch--a failure, say, to regulate derivatives... In fact, some New Deal-type regulation was actually intoduced in recent years...think of the Sarbanes-Oxley Act.  The problem was not that we "deregulated the new Deal" but that we deregulated a much older, even ancient set of laws.

The first of these were contract rights.  "As one company after another "reorganized" in Chapter 11 to shed contract rights, working people learned that it was not rational to count on those rights and guarantees, or even to think in these future-oriented ways.  No wonder people in our country began to live for the moment and take out loans and start running up debts.

And then we dismantled the most ancient of human laws, the law against usury, which had existed in some form in every civilization from the time of the Babylonian Empire to the end of Jimmy Carter's term, and which had been so taken for granted that no one ever even mentioned it to us in law school.  That's when we found out what happens when an advanced industial economy tries to function with no cap at all on interest rates.

Here's what happens: the financial sector bloats up.  With no law capping interest, the evil is not only that banks prey on the poor (they have always done so) but that capital gushes out of manufacturing and into banking.  When banks get 25 to 30 percent on credit cards, and 500 or more percent on payday loans, capital flees from honest pursuits like auto manufacturing.  ...  What is history, really, but a turf war between manufacturing, labor and the banks?  In the United Sates, we shrank manufacturing.  We got rid of labor.  Now it's just the banks. 

Geoghegan's unusually provocative article is worth a read.  More broadly it raises an important question.  Will the United States undertake real reform to strengthen contract rights, limit usury, downsize our financial sector and upsize our productive base.  This is an outstanding opportunity for meaningful reform to address the middle class impoverishment that, as NDN has long noted, lies at the root of our current crisis and whose reversal is also critical to our democracy.