The Price of Civilization

1. The Price of Civilization Chapter 2 Prosperity Lost

2. America’s Approval • Wary, pessimistic, and cynical • 2/3 of Americans are dissatisfied; US is “off track” • 71% say federal government looks out only for its own interests • 70% say government and big business work together to hurt consumers

3. America’s Lack of Confidence • Institutions closer to home > national/global institutions • Loss of confidence in each other • Robert Putnam: “bowling alone” • High in ethnically diverse communities • “hunkering down”

4. Richard Easterlin’s Subjective Well-Being • Self-reported happiness • Between 1972 and 2006, between 2.1 and 2.3 (scale of 1 to 3) • GDP doubled during this time, yet no sign of change in happiness as a result • Declined among women • Gallup Poll: 19th • Hedonic Treadmill • US running very hard to pursue happiness, but are staying in the same place

5. Jobs Crisis • 9% • Peak 2007 - Trough 2009: 8.6 million jobs lost • 2000s = lowest job growth since WW2 • Highest for lower-skilled • 15% for no diploma • 10% for diploma/some college • 1975 • Bachelor’s degree = 60% more income than HS diploma • 2008 • 100% • Housing crisis

6. Savings Crisis • National savings rate • 1980s-2008 sharp fall • As individuals lost financial prudence, Congress did too • 1955-1974: below 2% GDP • 1974-1995: above 3% • Caused retirement crisis • Center for Retirement Research at Boston College; “National Retirement Risk Index” • 43% unready 2004 • 51-60% in 2009

7. Investment Squeeze • China: 54% of national income • American Society of Civil Engineers (ASCE) • Report card 5-year investment needs to correct major problems • D, “poor”, $2.2 trillion = 2-3% GDP • Intellectual capital – the pride of America – diminishing • Most serious threat to human capital – quality of work force • Most important factor of US future prosperity

8. Education • Human capital • Program for International Student Assessment (PISA) • 2009: 15th reading, 23rd science, 31st math • Shanghai #1 in all three • 12th in the world for portion of 25-34 year-olds with at least an associate’s degree • More people attending college, but same rate of graduation

9. New Gilded Age • Income gap/inequality • Highest since Great Depression • 1/8 Americans on food stamps • Top 1% > 99% in net worth • Dishonesty = contagious social disease • Social Immune System • Something goes wrong – lie • Almost nobody at the top pays for the lies, even with the truth surfaces

10. Government and Big Business • Dick Cheney: CEO of Halliburton to VP • Goldman Sachs, Citigroup, JPMorgan Chase: central part of financial crisis 2008 to Obama administration • Goldman Sachs: SEC charged $550 million for fraud; company made $13.4 billion • Countrywide CEO Angelo Mozilo: fraud with $67.5 million fine; made $470 million

11. The Price of Civilization Chapter 3 The Free-Market Fallacy

12. Age of Paul Samuelson • 1940s to 1970s • First American winner of Nobel Prize in Economic Sciences • 5 core ideas of modern mixed capitalism: • Markets are reasonably efficient • Efficiency ≠ fairness • Fairness = share the wealth; government redistribution of income • Markets underprovide certain “public goods” • Markets prone to financial instability; solved by government policies

13. “Great Stagflation” • Bretton Woods dollar-exchange collapse • US abandons link to gold on August 15, 1971 • Surge of oil prices 73-74 • Economic stagnation and inflation • Reaganomics and Margaret Thatcher • Decrease rich tax rates to unleash entrepreneurial zeal • New disdain for the poor who depend on the government for support

14. Adam Smith’s Invisible Hand • “Market equilibrium” • When the balance of supply and demand is reached for each good/service • ME is reached without a central planner • If everyone aims for self-interest, well-being for all • “self-organizing system” • Competitive ME is efficient – no waste of resources

15. Why Free Markets Need Government 1. Provide public goods • Private markets work with many suppliers and consumers, but fail because only need “single supplier” for some goods • Causes adverse spillovers; too much of a good thing is bad (pollution) • Need “corrective pricing”; taxes to get rid of pollution 2. Regulate markets when info between buyers and sellers is “asymmetric” • Sellers have inside info buyers don’t leads to fraud, insider trading, etc.

16. Economic Fairness • 63% of Americans believe it is the responsibility of government to take care of citizens who can’t take care of themselves • Rule of law – treat everyone equally; redistribution should follow due process • Distribution of income and well-being – both at a point in time and also across generations: “sustainability” (fairness to future) • “Stewardship”: living generation must be stewards of earth’s resources for the next generations; only have one Earth

17. Libertarianism • Liberty: the right of each individual to be left alone by others and the government • Individuals have no responsibility to society other than to respect the liberty and property of others • Tax = government extortion • Most Americans accept legitimacy of taxes – 61%

18. Libertarian arguments • Moral assertion: everyone has the overriding right to liberty • Political/pragmatic: only free markets protect democracy from government despotism • Economic: free markets ensure prosperity

19. Triple Bottom Line • Efficiency (prosperity), fairness (opportunity for all), and sustainability (future) • Joseph Schumpeter’s “Creative destruction”: new technology wipes out way of life • Free markets do not guarantee sustainability • Natural capital is property of everyone and very vulnerable • Market interest rates • Interest rates are positive because people are impatient

20. Efficiency and Fairness • 10-20% say market outcome is fair • Rich should be taxes, poor should be helped • Trade off • Rich are taxed and poor are helped through transfers = hard work of rich is punished while idleness of poor is rewarded • Scandinavian opposite • Promoting fairness also promotes efficiency

21. The Price of Civilization Chapter 4 Washington’s Retreat from Public Purpose

22. New Deal to War on Poverty • Federal government steered national economy as an instrument of democratic power • S&T initiatives: nuclear power, satellites, computers, Internet • 1960s Medicare, rights for women and disabled

23. New Deal Programs • Extended during 40s-60s • Construction of physical infrastructure (roads, etc) • Regional development • Increased provision of public services (education) • Social Security • Support for science and technology • Public administration • Income security (unemployment insurance) • Food stamp and welfare programs

24. FDR, Reagan, and Clinton • FDR: “Government is the instrument of our united purpose to sole for the individual the ever-rising problems of a complex civilization.” • Reagan: “In this present crisis, government is not the solution to our problem; government is the problem… It is my intention to curb the size and influence of the Federal establishment.” • Clinton: “The era of big government is over.”

25. Rise of Public Spending • Government’s economic role: civilian (nondefense) federal spending relative to national income • Rose to 16% of GDP by 1980; unchanged until 2008 • Everywhere in the world; more in Europe • Reflects need for a mixed economy

26. Complacency with Big Government • 1940s to 1960s • Nation had gone through “near-death” experiences and emerged as an increasingly united society: Great Depression and WW2 • 1924 Immigration Act slowed flow of immigrants; 15% in 1924 to 5% in 1970 • Government was competent and representative of national interests; NATO, EU • JFK and LBJ; War on Poverty

27. The Great Reversal and Jimmy Carter • 1977-1981 • Big Labor lost its political influence; rise of Sunbelt power; 1978 Revenue Act; Japan exports increase • Deregulation • “Big government” constituted the major barrier to prosperity • Government lost its aura of competency

28. Reagan Revolution