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The Federal Reserve is not working for the people but for wealthy individuals and corporations that can afford to have a say in the rules.
Banks collapsing, high inflation and countries moving away from the dollar spell big economic trouble for the United States. Economist and author James Galbraith joins Scheer Intelligence host Robert Scheer in discussing how the dwindling path of U.S. economic decision-making has led to the current state of affairs and the role of policy, including the actions of the Federal Reserve, politics and corporate takeover, in the state of the country.
Many of the problems defined by Galbraith and Scheer revolve around the shifting of power in the financial sector, particularly with an institution like the Federal Reserve. Rather than serving the people, “the Federal Reserve was always constructed to be responsive, to have the voices of the banking system strongly represented as the banking systems become more and more concentrated in the hands of the very largest banks. Their voices have gained evermore weight,” Galbraith said.
Internally, the rules have shifted towards the financially powerful, and Galbraith uses the Bush administration as a major example of this move. Whether it is the expansion of Medicare Part D, which included no control over the price of drugs, helping the pharmaceutical industry, or having a major corporate figure in Dick Cheney as vice president, the shift “uses the established state apparatus to support powerful clients, which is very far from being a free market approach to economics; it’s really crony capitalism.” Democrats, Galbraith says, also contribute to this as “they pursued the same agenda of deregulation, which once was deeply embedded in the financial system, [and] was just a recipe for meltdown, for disaster. And we’re seeing the consequences as well, of failure to maintain core infrastructure, which has been going on for a long time.”
The active moving away from the dollar, largely as a result of hegemonic US foreign policy, is also a major problem facing the nation. With Russia, China and India committing to trade cooperation with one another, the dollar dominance that once stood strong is wilting away. “We are seeing the emergence of a non-dollar and also non-Euro zone in world trade and commerce, which is the first time that’s happened seriously in, well, quite a long time,” Galbraith said.
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Robert Scheer: Hi, this is Robert Scheer with another edition of Scheer Intelligence, where the intelligence comes from, my guest. And now I mean this guest, James K Galbraith, one of the most famous economists we have in the country. And I can’t resist saying also the offspring of, I think, probably the most value, well actually he was Canadian to begin with, your father, but clearly, from when I was in graduate school studying economics, my hero was your father, the great Professor Galbraith, who and I’m going to end with this discussion about a work of his called The Affluent Society, which I think was way ahead of his time. But it really was discussing how do we deal with being, having such wealth, such affluence, such power, and yet having tranquility, having a happy population, catering to the needs of people who, to my mind, it’s the ultimate refutation of Adam Smith, if you like, But we can discuss that. Right now, we want to, we’re here to talk about the current problem with the economy, problem with banking, problem with inflation. And you wrote a very interesting, provocative, thoughtful article for The Nation magazine, which, by the way, I would point out, is the oldest continuously publishing political journal in the United States, whether of the left or the right. And they have had a tradition over a long time now, well over a century, of covering what’s going on with the economy and your headline is quite provocative. It’s “What Elizabeth Warren, Larry Summers and Paul Krugman…” So Larry Summers was the one who engineered a lot of the mischief of Wall Street. Elizabeth Warren was a populist senator who tried to challenge it. Paul Krugman has been the go to of liberal of some conscience as opposed to a neoliberal who’s tried to criticize it. But they all got it wrong about the collapse of Silicon Valley Bank. And what intrigued me was your subheadline, “It’s a war for the dollar and the big banks, the rest of us better hold on tight.” So what is this war for the dollar and the big banks?
James K. Galbraith: Well, just to begin with, let me specify for your listeners what I intended. Well, and the text that underlies that headline, the headline is, of course, always the editor rather than the author. But in this case, you know, it’s provocative and I think it is useful. And what, you know, Elizabeth Warren and the others were, I think, focused on was the management of this particular bank. And my point was that if this were the, really the source of the difficulty, then we wouldn’t have a banking crisis, a problem. We wouldn’t be talking about contagion because it would be a one off thing. There was a bank which did something wrong, and this was characteristic, by the way. Also, of the focus in the last crisis, when the problem was largely with the failure of regulation to control the quality of mortgages that were being made, that led to the vast, that was actually very widespread in the banking system and led to a vast number of failures. Well, in this case, my argument is the source of the difficulty is the policy that is being pursued by the Federal Reserve. And while Silicon Valley Bank was exceptionally vulnerable to that policy, it was by far, far from being the only bank that was vulnerable to it and far from being, you know, in some sense, that’s not at all as though it were, it had a loan book that was failing or something of that nature. What was happening. It was vulnerable to the rise of interest rates, which affects the whole banking system. And that’s why we see the threat of contagion and the measures that are being taken to try and contain it. The Fed, the Federal Reserve’s policy is the source of this problem.
Scheer: So why is this again your subtitle or whether the editor’s subtitle, it’s a war for the dollar and the big banks?
Galbraith: Well, I guess to the question of why the Federal Reserve has pushed up the short term interest rate as far as it has. There’s a whole, of course, let’s say, monologue about that that comes from authorities. They’re always acting in the public interest in fighting inflation. But this is very hard to take seriously at this point. The inflation rate peaked nine months ago and has been falling. There’s a lot of talk about tight labor markets, but in fact, wages are lagging behind prices. And so what we call the real wage has actually been falling. And that’s the variable that economists think If they think about labor markets as the one that should be the, you know, the test of whether the labor market is tight. So logically and empirically, these public justifications are hard to take all that seriously. So the real question is, is the Federal Reserve really convinced by its own rhetoric or is it motivated by some other forces? My strong let’s say let’s call it suspicion or, you know, sense of the matter, is that the underlying motivations, first of all, are the interests of the large banks. And secondly, the strength of the U.S. dollar in the world situation where the dollar’s position is for the first time in about 40 years, a little more precarious than it has been. And so that’s where I would look for the underlying sources of the motivation behind this policy.
Scheer: So let me… You raise a number of questions. First of all, most of us have trouble understanding just what the Federal Reserve Board does and who they represent and so forth. But just on the surface of it, to say the big problem in America now is a tight labor market, which means finally people working at Starbucks or at Whole Foods or someplace, Amazon may be getting up to 20 bucks an hour or something. That’s really not even a living wage. Even though we say the living wage is like around 15, this tight labor market at least brings some of the loot of the most affluent society, the most successful economy in world history, to some, to the masses of people. That’s something labor unions used to do, it used to be, you know, when I was growing up, my relatives and everything and my parents, they could get a job, a union job, maybe at the U.S. Steel, at the automobile, the United Electrical Workers, and have, you know, a decent wage, pay their bills and so forth. Now, this Federal Reserve Board seems determined to hold down wages, you know, at a time where they don’t hold down corporate profits, they don’t hold executive wages. We’ve had this incredible explosion over the last 40 years, the income gap and so forth. And yet the big enemy and as you point out, real wages haven’t actually increased very much. What’s going on? Is this politics by another game and is it establishment politics benefiting the rich? One other thing I’d just like to ask you about the Federal Reserve. I remember in the other, the big banking meltdown when Timothy Geithner was the head of the New York Fed and he’d been in the Treasury, went back to the U.S. Treasury. His whole concern was to save the big banks, funnel money, you know, through AIG and all that, to save the big banks. What is the Federal Reserve? Is it an agency of the most powerful, richest people and enabling them to get more?
Galbraith: Well, you know, the Federal Reserve is the central bank, and the central bank is a banker to banks. And the Federal Reserve was always constructed to be responsive, to have the voices of the banking system strongly represented as the banking systems become more and more concentrated in the hands of the very largest banks. Well, their voices have gained evermore weight. I don’t think there’s really any mystery to that in terms of the effect on…
Scheer: That’s what I’m getting at. Is this serving the people?
Galbraith: No, of course not. I mean, of course not. The Federal Reserve was originally established as an entity that could be controlled by the large banks of Roosevelt in the New Deal, altered that and gave… Placed the center of power in Washington with the board of governors. But over time, the board of governors is, you know, very highly responsive to the banks. So the question of whose interests are represented there is I think, you know, it’s fairly straightforward that it’s not all that different from what it was at the beginning with a very heavy weight to the views of the big banks. Let’s go and talk a little bit about wages here, because, yes, you’re quite right. There’s a strong case in equity, there’s a strong social case, and there’s a strong economic case for bringing up the wages of all the vast numbers of American workers, a large majority of them who work for relatively low wages. And I’ve always been an advocate of a minimum wage, which was a decent, modest living wage. $15 an hour, you know, has been the target for quite some time. And some states have taken that and made that their wage. But it’s not yet reached the level of being, you know, successfully implemented at the national level. This would be good. It would not be inflationary and it would not justify a rise in interest rates to counteract it. But that’s not what’s happening. What’s happening actually is a rise in interest rates when the wage rate on average hasn’t risen as much as prices, so that these workers are not gaining ground, they’re losing ground and yet interest rates are going up anyway. And so I just ask the question, why is that? What is the justification here? Even if you take the, you know, textbook view of how, as I say, labor markets are supposed to work, that view would not support this policy. So that leads me to say, you know, look, is something else going on here? And that’s why I come back to this question of what is the role of the dollar in the world system as a motor force behind what’s going on.
Scheer: So what does that mean that we’re backing the dollar as opposed to if we were on the gold standard we wouldn’t have to back gold, it would assume to find some natural outlet. People have access to it. It’s not controlled by one government. Right. That was the sort of beauty of a standard like that. It was kind of neutral and in effect. And, you know, if that were the standard, when you have dollars, the dollar being the standard, it obviously favors the country that can print these dollars, that can control the outflow and so forth. And that is being challenged now, isn’t it? Because, for instance, I was looking at the latest figures from March that India and China are buying most of Russia’s oil now, which is the highest point, and they are buying it in their local currency. They are not using the dollar because we have these punishments against Russia over the Ukraine. But still it’s challenging the dollar. And if Saudi Arabia gets into that and now, you know, Iran and Syria, because they also, you know, and particularly Iran and Iraq with oil, the challenge to the dollar might not be a good thing for U.S. power, but it might be a good thing for more irrational allocation of rewards and resources in the world, might it not?
Galbraith: Well, this is a question of perspective, but let’s just say that it’s a fact that a significant part of the world economy, the major players in the world economy, are insulating themselves from transactions in the dollar, from passing transactions, for example, in oil through the dollar. Why are they doing this? Well, they’re doing this because the sanctions regime that was placed on the Russian Federation has made it clear that transactions in the dollar might not be entirely secure, that reserves held in dollars can be frozen and might even be confiscated. And so if you’re in the position of doing a lot of international transactions, you know, it’s very plausible and rational to start doing them in ways that don’t involve vulnerability to that kind of policy. So in some sense, if you like, I wouldn’t say the dollar is under attack. I would say that the policies that were implemented for a different reason have had the effect of undermining confidence in the dollar in certain major players in the world. And so we are seeing the emergence of a non-dollar and also non-Euro zone in world trade and commerce, which is the first time that’s happened seriously in, well, quite a long time. But they maybe really since before the Second World War. So that’s something which I would at least plausibly believe would concern both the Federal Reserve and the major American banks. And that would in there would lead toward, let’s say, a policy of bringing money into the United States, which is which is what is the effect of raising short term interest rates so that in some sense keeps the value of the dollar from being affected in at least in the short run by the emergence of a non-dollar zone.
Scheer: Okay, look, let’s look at this language a bit. It’s not an attack on the dollar. It might be a divorce in the same way you could have a divorce in a marriage. And that we don’t want to play in your playground any more. We don’t trust it. Because, after all, if you can suddenly make all of our savings disappear or freeze our assets or what have you, then the dollar is no longer a neutral agency of exchange. It’s a vehicle of U.S. policy and those who follow it closely. And it seems to me here, I want to get into this larger question of the challenge from China, because obviously it’s a much more economically significant country than, say, Russia, obviously, but also the BRIC alliance. We would take countries like Brazil. Now, even South Africa is open to this, certainly India here where India and China have been shooting at each other and everything. But they now seem to be moving to a common perspective that there needs to be a multipolar world. It shouldn’t be all this power centered in the hegemonic U.S. And I just want to ask you, are the plates shifting that we’re really developing a very different, or the potential for a very different world economy and connected with that is people who produce raw materials saying we want to get in on the other end. Now for instance, China saying, okay, we got this cheap labor, but that’s going to run out. Our population is starting to decline as it should, with prosperity. The whole world has always wanted population control of some kind or other. And they’re saying we want to make more advanced chips, we’re going to make better cars. We’re even going to make airplanes. And isn’t this really about asserting U.S. power over the world economy?
Galbraith: Well, I think the effort to turn the dollar system into an instrument of U.S. policy, the means you’ve just described, is an effort to exert U.S. power. And it’s one which is going to, in effect, bring on countermeasures. That’s I think, this is what one should expect to happen. And it seems to me that it is happening. So what is the source of the tension? Well, I mean, there are lots of issues here. But fundamentally, it seems to me that 20, 30 years ago, it was plausible to view the Chinese economy as complementary to the U.S. one, that is to say we supplied capital goods and advanced technologies and also consumer standards to Chinese industry, which then supplied us with very large quantities of basic consumer goods and clothing and appliances and electronics and the whole range of things. And this was a relationship that built up considerable interconnection between the two countries. But in the course of events, of course, the Chinese industries get better and better at doing what they do, and they move up the ladder of technology. So they become, instead of complements, they become effectively competitors at the high level, and that is going to create tension. Essentially, that’s a very neutral way of describing what the process we are now at. Or the place that we are now at where what was essentially a symbiotic relationship becomes a competitive one. And that’s in the nature of events, if you like.
Scheer: What’s essentially an exploitative relationship. And I’m just, the reason I’m pushing these questions with you is I read a couple of your books and I think that you are one of our big thinkers. And I’m not saying that to flatter you, but in so much of the discussion about economics, we don’t get to sort of bigger concepts and choices and so forth. But the two books that you’ve written, one the Predator State and the other The End of Normal, and they’re about ten years apart or eight years apart. ’08 and I believe ’16, 2016 or something. There’s a theme running through them. One is that we never had this illusion of the free market, that there never really was a free market. You have a wonderful description somewhere and you’re writing about Adam Smith Scotland and how basically the view from Scotland that they really didn’t have anything. All they did was have access to the English empire’s market and so they could take advantage of India for example, and it never was going to be equal. It was always going to be exploitative and, you know, would always be predatory in a way that was economic colonialism. And then in The End of Normal, you’re really talking about why people won’t necessarily accept situations of exploitation and disadvantage. So I want to get to those big ideas, because I think with China, for example, you know, and again, I mentioned your father’s book, The Affluent Society, which I thought was a work of genius. I must say, as a graduate student. I read that book. It changed my life, you know, because really, it basically said, okay, some people are going to get really wealthy, wealth is going to be created, but how are you going to spread it around? Who’s going to get advantage from it? Are you going to make and spread it around enough so you have stability, so you don’t have wars, you don’t have hunger, you don’t have racism and tension and so forth. It seems to me that’s where we are now. The issue with China or India is not just nationalism. They happen to have between them almost, what, 3 billion people. They have a big chunk of the world’s population if those people don’t have a good life. Where is human rights if they can’t pay their bills? If they have to work in sweatshops or little Apple concentration camps assembling iPhones? If they can’t get to the high end of production where you can maybe get a fishing boat and maybe have a car in the garage, etc., it seems to me there’s a social justice question at issue here now in the reordering of the world economy. I just would like to get you to comment on that.
Galbraith: Well, let me take up The Affluent Society just for a minute here. It’s a very important book in my life, and in part because it’s partly dedicated to me. So it has a personal importance. But I think the first of all, the underlying premise of the book, which is, as you say, is that of and particularly in the postwar era, and for the first time in the United States, the basic material needs of most people were being met that food, shelter and clothing and so forth. And so this was a question, the question that came up was, well, distribution was a part of it, but a much more important part of it was what my father called social balance, what he called the problem of private opulence and public squalor. And this was a crucial element in assuring that the society has a, let’s say, a broad solidarity with its entire population. The environment is an extremely important part of that, but also the quality of urban life, the ability, the access to parks and to cultural facilities and to essentially things which are more, which exist on a higher plane than both private profit and the accumulation of personal possessions. And this was the big message of The Affluent Society. And it sparked in many ways, the counterculture movements of my youth in the 1960s and sparked in support of the civil rights movement. It underpinned Lyndon Johnson’s Great Society in a very important way. So this was all part of, you know, in some sense the ethos of that book, which was substantially pushed aside in the beginning of the late seventies and eighties in the Reagan era. These questions were not, were no longer considered to be a, you know, central role in American politics. So that we regressed in terms of the quality of our discourse on these matters. My book, The Predator State, which was in some sense, a derivative of another one of my father’s books, the New Industrial State, that came out in 1967, was also an important book. But my book was about the way in which American politics was built on the contest over existing social institutions like Medicare, like Social Security, where the pressure is these things now exist and do provide important social protections. That the political battles become over shaving off parts of them for the benefit of private interests. You know, a nice example was the way Medicare Part D, which was an expansion of that program under the Bush administration, was constructed but without any effective control over the price of drugs, so it was very good for the pharmaceutical producers. This kind of thing uses the established state apparatus to support powerful clients, which is very far from being a free market approach to economics, it’s really crony capitalism is one way of talking about it. I thought the phrase “the predator state” captured what was going on fairly effectively. So what do we see notably in China? I think there’s a fair statement is that we see, first of all, the idea, the concept of modest prosperity is a real thing. And so the idea that the deep poverty should be eliminated, but also the idea that the urban centers where most Chinese now live, the big transformation in the last 40 years as China has become an urban country of the scale that has never before been seen that these centers should be decent places to live. That they should be reasonably orderly, clean, they should have good transportation, all kinds of things that have been built up and in Chinese life. And that, I think in some sense, is an important element of the stability, solidarity of Chinese society.
Scheer: Are you still with me? Hello?
Galbraith: Yeah, I’m here.
Scheer: Well, but this is a big deal, because in reporting in the United States basically about it, that is just seen as verbiage, you know? Now Xi has a slogan, Common Prosperity. I noticed this statistic just recently, this week that the number of billionaires in China has declined. I don’t know how they calculate it, but there seems to be some consensus that the swings have got to be curtailed or mass transit is actually thought to be valuable and that the quality of air I mean, you can’t breathe in that Beijing during part of the year. And this really goes back if we go back to Adam Smith, this kind of goes back to the teachings attributed to Confucius, basically, or you can even go to Aristotle that how to be a good emperor, you know, that you have to take care of the people. You have to, there has to be some measure of accountability, at least to your own population in the case of China and India, you’re talking about a good chunk of the world’s population, you know.
Galbraith: Yeah, well, this is I think you’re right that there was an element here of what makes a ruling, let’s say ruling elite legitimate is its ability to maintain, you know, social stability and sense of progress. China’s full of problems that inequality and the income distribution got very, very aggravated over the 30 years of the reform of corruption, undoubtedly a major question and environment and the deterioration of the air and the water are extremely important questions. Whether those questions can be dealt with or will be dealt with is a test going forward of the resilience of the system. But what I think reasonably clear is that the system does have a record of responding to problems and crises in the past. And what the most remarkable recent case was, of course, the pandemic, where the where we’re trying to was able and did mobilize its whole society to keep the virus under control, it relaxed that and the virus spread very rapidly at recent times. But that was a different variant and one which had much less effect on the stability of Chinese society than it would have been the case had it not been contained in 2020 when it was running, raging throughout the rest of the world. So again, you can see this, these questions, there’s no guarantee in the Chinese case that things will continue to be stable or continue to be, that their success is never guaranteed indefinitely. But you can be quite sure, I think, that the broad, vast body of the Chinese population has not yet been disaffected from its governing structures.
Scheer: You know, it’s interesting the use of language and I think the American framework, which again, I think your father’s writing challenged in a certain brand of liberalism. I don’t know if it exists much anymore, but, you know, the whole idea of the U.N. and so forth, and it’s been pointed out, even in our occupation of Japan with somebody like Douglas MacArthur, who, you know, no one thought of him as a great social pioneer, but the Constitution that he created for Japan and also how we influenced Germany after the war and the distribution of land in Japan, all have contained a kind of what, social justice notion. You know, the big landholdings were broken up under our military occupation. The rights of women were affirmed. And this happens a great deal in Germany. Now we’re into a different mood where we are centric, our well-being is central to it, and we have all the answers. We don’t look to any of these other societies. And it’s really, you know, it’s very odd. I happen to have been in Russia and reviewed Gorbachev’s book when it first came out on perestroika and so forth. And, you know, and I remember at the time there was a sort of celebration, no, this is not the right way, there has to be this open capitalism and so forth. And that gave rise to cartels and everything. Now, you look at Russia and this guy Putin, we still treat him as if he’s the head of a Communist Party. But he in fact, was the anti-communist. Okay? He defeated the communists. He had been, yes, apparatchik, but he then ran. He was a guy Yeltsin picked, we supported and so forth. Yet, and looking at the situation now, there’s an alliance between an anti-communist Russian leader and a communist-run China, which never happened under the umbrella of communism, allying and actually getting support from Brazil, from South Africa, from much of a lot of parts of the rest of the world, that maybe we don’t have the language, we don’t have all the critical ideas, because, you just mentioned is two words. You know, how did you put it, the part from, your father, the private opulence and public squalor. That could be the basis of a national teaching. How did American democracy come to be produced exactly… I mean, if there was any notion at all and built in and de Tocqueville described it and the hopes of American democracy, it was some kind of expanding basically class of what? Of apprentices, of workers, of farmers, of the middle class. Yes. White Yes. Led by males. Yes. Yes. But still, there had to be this expanding, whatever you want to call it, not an elitist…
Galbraith: Let’s take this back, if you like almost a century now to the early 1930s, and ask what the options were in the world at that time. And that was basically three. That was Soviet communism, which was really very effective at industrialization, but also very brutal and of course, far from… the absolutely opposite of democratic. There was European fascism, which was also highly militaristic and very brutal. And there was the American New Deal. What there was not was any sense that the traditional laissez faire capitalism of the 19th century was going anywhere in the world. That was just simply nothing, no constituency for it. Of the three models, by far and away the most successful, was the American New Deal. It was a, if you like, post-capitalist development which created both the welfare state and the public, the public sector, public infrastructure and all kinds of dimensions, a vast construction project which is all around us, even today. Now. So then we ask, okay, the aftermath of the Second World War, what happened? Well, one of the things that happened, it happened in Asia, but also to a degree in Europe, was that the American New Deal spread to Japan, spread to Korea, spread to Germany. It was part and parcel of the reconstruction of those regions. And it was highly successful in that respect. Blending with your earlier, you know, social and cultural economic forms but very, very influential. One of the major sources of that influence was a certain new dealer who happened to be my father. It had a deep following in Japan. He was also part of the early reconstruction of Germany, of Western Germany. And he was influential in Korea. And by the way, he was very carefully followed and read in China, especially in the early period following the death of Mao Zedong. So what one has here is in some sense a model that has been decaying and evaporating in the United States, but taken up in a lot of other places with the results that we see. What happened in the United States again and in Britain too with the Thatcher/Reagan ideological revolution was strong pushback on everything that was public, everything that was done by the government, everything that was social insurance, everything that was collective. And we can see the consequences of this now are really beginning, you know, in a serious way to show.
Scheer: So I was interrupting before because your father was also the ambassador to India, wasn’t he?
Galbraith: That is true.
Scheer: Yeah. And so when you think about it, this I think, is really I mean, this is worth the whole podcast as far as I’m concerned. This notion that this was our gift to the world at that time, that, you know, communism has failed. It was brutal and it was inefficient in the long run because it did not did not have a component of consumer sovereignty. It did not have a market notion of accountability. And so a bureaucracy would become ever more brutal and coercive and inefficient. And what I, you know, I guess you could throw Arthur Schlesinger, there’s a bunch of these intellectuals who actually suddenly were world class figures, and they advanced the notion of enlightened democratic capitalism, whatever you want to call it, that you could call it social democracy. It was represented sometimes by social democratic parties in Europe and sometimes by people who claim to be more conservative. But all of them accepted a notion of not having vast income disparity and being accountable in the way you described it. What I want to remember, before we leave, because I think we have a big picture idea here. What happened was it’s not just the Ronald Reagan’s and the Thatcher’s, it’s also, dare I say, Bill Clinton.
Galbraith: There’s no question. Yeah, no, I mean, Reagan was in some sense the turning point here. By the time the Democrats came back in, well, with Clinton and then onwards, they had absorbed, the political lesson they had learned was that they needed to mouth the same platitudes that were coming out of the Reagan era. And, you know, in some sense, the Republicans were always more realistic about this. This is why I subtitled The Predator State, How Conservatives Abandoned the Free Market and Why Liberals Should Too, because the conservatives were where, you know, particularly when you got to the Bushes, this was plainly a corporate state. It was you know, it was a state that was being run by the former chief executive at Halliburton. If you need more than that, you know, you’re not seeing clearly what was going on. But the Democrats for, partly for, out of protective political coloration, embraced the rhetoric of small government, free markets and all of this. And they pursued the same agenda of deregulation, which once was deeply embedded in the financial system, was just a recipe for meltdown, for disaster. And we’re seeing the consequences as well, of failure to maintain core infrastructure, which has been going on for a long time.
Scheer: Well, this is something I mean, we have to grasp because it’s always being presented now as a fight for democracy and freedom against totalitarianism. And, you know, and so therefore, we justify, you know, in really reversing Richard Nixon’s wisdom and Henry Kissinger’s wisdom in trying to include even Mao Zedong’s communist China in the work of all nations. We now have this thing we were hostile to private companies like Huawei in China and the daughter of the founder ends up being in house arrest in Vancouver. And they are, by definition, the enemy. And in India, you have a Trump like figure. But he’s the enemy because also he has to care about India and whether you are, you know, the right or the left in Brazil, you have to care about all the people who live in Brazil. Isn’t the real issue now whether ordinary folks throughout the world get a say in what’s going on? I love this image. I’m going to be drunk on this for probably what remains of my life, private opulence and public squalor. The reason I guess, which book is it of your father?
Galbraith: That’s in The Affluent Society.
Scheer: Oh, great. By the way, can we agree on that? Everyone should read The Affluent Society. I mean, I No, really, I put it way above Marx’s Kapital or, you know, I mean, or Wealth of Nations. By the way, my students have never heard of Adam Smith or Wealth of Nations or Ricard or any of the people that I studied. You know, John Stuart Mills, any of the great thinkers. But this idea. What else? What better way?
Galbraith: Smith, by the way, remains worth reading. He’s far from being the stick figure that libertarian conservative thought have made him out to be. Full of interesting insights and you know, humane judgment. So I put in a word for the real Adam Smith over the caricature that has come out.
Scheer: Oh, I’m not putting down Adam Smith either, the way I don’t put down libertarians. If libertarians, when they are consistent, when they are consistent, yes, a free market would mean breaking up, you know, Google. You know, it would mean not having these trade agreements that favor cartels.
Galbraith: All right. Well, these are all you know, as I say, they’re fantasies because, you know, how many search engines would you really want to have to go through in order to find something? The real issue with large entities is to keep them, you know, effectively regulated so that they remain stable and they serve public purpose. You wouldn’t want to break up a nuclear reactor into ten smaller reactors, but if you have a nuclear reactor, you want to make sure it’s properly controlled. That’s the essence of it.
Scheer: I understand. But the essence of Adam Smith, you know, here I am, the guy who got pushed out of graduate school and became a journalist. But the fact of the matter, there was a wisdom to the invisible hand of the market, which is that, you know, one got to control it. And what we began this discussion with was a mechanism of control, the Federal Reserve. I don’t want to be a conspiracy theorist here and rail against the Federal Reserve, but there’s something truly absurd about what happened to the American economy when, you know, you had the Financial Services Modernization Act. I remember at the time I was working for the L.A. Times, I sat there in Washington and in Barney Frank’s office, he was head of the key committee. And I said to Barney Frank, why do you want to do this? Why do you want to reverse the essential legislation of the New Deal to prevent, you know, banks that have the savings of ordinary people and allow them to act like commercial banks and allow the commercial banks to actually break down this Glass-Steagall wall and so forth. Why do you want to do that? And he told me, Bob, it’s so complicated. I’m going to tell you, here’s my aide, talk to him. And then the aide finally says, well, I really don’t understand it, but here’s this other fellow. I say, That guy’s a lobbyist for the very bank you’re trying to save. And it became absurd. And the whole thing was to allow Citibank, right? And Traveler’s Insurance to emerge. And then Robert Rubin, a good liberal Democrat, goes to work for these guys once they’re made legal. Come on. You know, this has been, what do you call it, public squalor…
Galbraith: Private opulence and public squalor.
Scheer: Yeah, I think about it. I mean, what I’m living here in Los Angeles and I go four blocks in any direction. I see thousands of people living under cardboard, for God’s sake, in Los Angeles. If in San Francisco, you go to what is that World force, what’s that big company that has the highest tower? And there’s people camped out all night on the streets, in the rain. Is this not public squalor and then opulence. I mean, goodness. You know, the income disparity is shocking. And by the way, let me take you back to the university. I didn’t mention you were at the University of Texas. But what happened to academic economics and public policy discussion? They basically justify all this, don’t they?
Galbraith: So far as I’m aware, I’m in a policy school. And so we are in fact, concerned with these questions. Whether we understand them effectively and have is another question. But it is important for the next generation to look around and see what’s going on and start to think about how they would deal with it. How are you going to deal with, well, I mean, how are you going to deal with a problem that was already very clear to Henry George in the late 19th century, progress and poverty. These two things are going on at the same time. People are being displaced and they are ending up on the street in numbers that we, you and I certainly did not experience in the sixties and seventies. But, you know, this is not a permanent feature of American life. It’s something which has really gotten very aggravated in recent years. Why is that? We need to ask the question and we need to ask how we deal with it.
Scheer: You know, let me just say, by the way, I’m older than you. I was born in 1936, and as a little kid, my father took me down to the Bowery. My father, I was born in the Bronx, and my father lost his job when I was born. So I know bad times in America and, you know, but my father took me down there because we had to go to a special section of New York to see people living in the streets. And even then, there was a great alarm about it. That’s why you had a New Deal, among other reasons. That was intolerable. Now it’s not intolerable. Now it’s considered all just the cost of doing good business, you know?
Galbraith: Sure. But your experience was, you know, part and parcel of the Great Depression. Theoretically, we’re not in the Great Depression now. Why is it that we have these problems? What’s going on? This is really the problem. It’s something that we ought to be, you know, asking about and just and dealing with and, you know, with a much greater sense of urgency than I detect right now.
Scheer: So what’s your answer? Because this is, you’re absolutely right. We don’t, we’re not in this Great Depression, and yet we have more visible poverty. I can’t you know, I was only four years old or something, but I don’t remember it. And we were in pretty poor areas where I grew up. You know, this kind of public squalor, taking your father’s phrase, private opulence, public squalor, which first of all, you would think is a prescription for disaster. How long can that go on? This is how I understand, you know, the Trump phenomenon. There’s a lot of people in this country, whether they call themselves Democrats or Republicans, who know it’s not working. On the other hand, there’s a courtier class of people who, you know, you can be an economist at a major university and you make 300,000 or 250,000. Your spouse makes something equal and you’re analyzing the economy where we’re talking about whether the $15 is a living wage. How do you live in Los Angeles or New York or Austin, for that matter, where you are, on $15 an hour? It’s a prescription for misery of failure and anger and feeding racism and division and everything else, is it not?
Galbraith: Well, I do think that a higher minimum wage would, as a minimum, that this would be a step forward. The federal minimum wage hasn’t been raised past seven and a quarter, so it’s well below 15. And there are a lot of people around here working for less than $15 an hour. So bringing them all up would be a very substantial step in the right direction. Now, again, do it does it deal with the problem that we’re talking about, which is of destitution and homelessness and the effects of the effects of the pandemic, the effects of people being being effectively evicted from their lodgings because the land has become so valuable that it’s in the interest of the landlords to kick them out. These are questions which need a good deal more consolidated thinking and, you know, priority in public policy. I have to exercise a certain amount of humility to avoid giving you a pat answer, because I’m not sure I have one. In fact, I’m sure I don’t. But I am quite sure that the priority of this question is going to get greater and greater as time goes by. It really is a sign that something is going very wrong.
Scheer: Well, you know, I could end it on that note, but since you’ve indulged me, if you could give me this, just aim for nine and a half more minutes, just an hour of this, I want to end where we began with the Federal Reserve and this emphasis on, you know, driving up right now the cost of things, the cost of things, of everything in order to contain this thing called inflation and to preserve the dollar, as you say, and the power of the very wealthy. And so the basic decisions that are being made and by the way, the head of the Federal Reserve is not even an economist, right? He has different training. But there’s a mumbo jumbo. What I loved about your father and very… I don’t mean to disrespect your books. The books are by the way, the Predator State published in 2008 and The End of Normal, published in 2016. I recommend these books very strongly along with The Affluent Society, and I forget the industrial… What was the other book that you mentioned?
Galbraith: The New Industrial State?
Scheer: Yeah, that was a very, very important one. I mean, a whole lot of the discussion about the war on poverty and Michael Harrington. Well, as I recall, your father was the person who took this dismal science of economics and said, no, we can all own it, we can all discuss it. It doesn’t. And this was a time when economics was the only reason I was studying economics in graduate school if I happened to have been an engineering student. I was good at math, really didn’t know anything about economics, but I could get a fellowship and everything because there was a mystery about econometrics and mathematical modeling. Well, that all turned out to be gimmicks for Wall Street to disguise their lust for profit and creating phony derivatives and everything. But leaving that aside, it seems to me what we’re missing in the discussion and what you have in your books is a notion that this is not a science, really, and it shouldn’t be mystified. There are people who, my slogan is, I always like to know in any story, who’s getting screwed and who’s doing the screwing and what the question about the Federal Reserve is, who is it serving? You said, wait a minute, this is bogus. Wages are not driving everything. They’re not the reason we have this inflation. So let’s take just the last 8 minutes, 7 minutes now, if you’ll indulge me, and tell me what’s going on. Yes.
Galbraith: Okay. Well, first of all, I should say a little bit about my own background in this area, because I went to work for the Banking Committee in the House of Representatives in 1975, and I was there on and off until the end over the Joint Economic Committee until the mid-eighties. And in that capacity we set up a framework for accountability of the Federal Reserve to the Congress. These were the hearings, which are now called the Humphrey-Hawkins hearings. I was the staff person responsible for doing that. So my take on the Federal Reserve is, first of all, it’s an important institution. It is an institution which is governed by law, set by Congress. That law gives it responsibility for, among other things, working to maintain full employment as well as reasonable price stability. So it’s not just about maintaining price stability, but employment is an important part of its mandate under law. It should take that mandate seriously. It should not simply, you know, wave its hands and say, we’re following that mandate by doing whatever else, whatever we really want to do. They should take that mandate extremely seriously. Secondly, it’s a regulatory agency. It should take its regulatory mandate seriously, and it should be operating with considerable independence from the people it regulates, which is to say from the banks, especially from the big banks. This is how it has historically failed to do. I don’t think you can escape from having regulatory responsibilities. The problem is exercising them in an effective and independent way. If you put lobbyists and people who take their cues from the banking sector in charge of the regulatory apparatus, it’s going to come out badly. And thirdly, the Federal Reserve has been under the influence for a long time now, really since the early fifties, of the idea that the manipulation of the short term interest rate is a, you know, it’s prime policy tool. And the manipulation of the short term interest rate is a very blunt instrument. When they start raising interest rates after having kept them low for a long period of time, they cause trouble every single time. You just can look at this a map of what we call the yield curve, the relationship between the short term rate and longer term interest rates, which get locked in as people take out low interest mortgages and business loans and everything else. And when that short rate goes up, the economy tends to crumble. Usually there’s a beginning sign of that or some form of financial crisis. It supports hot money coming into the United States as people take advantage of it. It destabilizes many, many things and that’s what’s going on now. And the notion that this is a sensible way to run a large, you know, economy at the center of the world system. To my mind, it doesn’t it doesn’t hold together as a story. It may be a way of exercising power in the world. That was a suggestion I made in the article. I don’t know what’s going on in the minds of these decision makers, but they’re not. If that’s not what they’re doing, then they’re clearly not thinking clearly, in my view, about what their responsibilities are. But maybe they’re just trapped in their own rhetoric and are unwilling, as people often are, to recognize that they were wrong in making their original assessments and that they should change course. Well, you know, what we’re seeing now is clearly something which is growing in the early phases of big trouble unless some fresh thinking is brought to bear. Where can that come from? Well, constitutionally, it should come from Congress. The problem that Congress has and you talked about this a few minutes ago when you talked about the repeal of Glass-Steagall. The problem that Congress has is that it raises too much money from the banking sector. That’s what the banking committees, which where I worked in, were very proud to work under Henry Royce and when Wright Patman was still there, it has effectively become just a well for campaign contributions from the financial industry to a very large number of members who serve on those committees. And that means that you’re not getting the oversight, you’re not getting the independent, public spirited public purpose oversight that Congress should be exercising. And that’s you know, you have to ask, okay, Well, beyond the Federal Reserve, where’s the source of the problem? The source of the problem is that the Guardians are not doing their job.
Scheer: So one last thought. So people are listening to this. If they’re friends of mine, probably, and this is public radio, they probably think it’s really sad that Nancy Pelosi is not running the House now, the Republicans are. It’s really sad that, you know, Joe Biden may not get elected. Maybe DeSantis will come in. But you’re really describing a picture. I know this sounds like an old trope, but it’s just so depressing because after all, it was Barney Frank, a great liberal, and he was on many issues, that I was talking to when he and Bill Clinton and always made an alliance with the Republicans in the Senate to push through the deregulation of Wall Street and incredibly mischievous behavior. And so people should think, how do we get trapped into these labels where the real issue is, you know, where is the power? And you described it the power of the banks, the power of what do you call it, the private opulence results in the public squalor. Is that not really a way we can end this, that if you have…
Galbraith: Yes, we have to rethink and we have to reorganize. Yes.
Scheer: So when you have an alliance of public appearance and squalor is the, that’s the result. All right. I want to thank you for being so patient with me. And I just really think that this just has to be the beginning of people questioning, you know what I mean? My goodness. You know, you go to the store now, you get to try to get a car loan. It could cost you 7%. Where did this come from? You know, if you had to have a variable loan and you thought you had a reasonable mortgage and now you’re going to lose your life savings and so forth. Yes, you don’t want to have a conspiracy theory and think it’s just, you know, this one or that one, in fact, if this didn’t have to happen. And I want to thank you for telling us that we have choices, which is and again, I want to recommend your books. The Predator State came out in 2008. That’s definitely still available. I got an e-version of it myself and The End of Normal, which came out in 2016. These are two absolutely indispensable books. If you don’t read anything else, these are two books that you got to read if you want to know how the political economy works, there’s no such thing as the economy. It’s a political economy. The decisions are political. There is no, it’s not that there’s a science that we can, you know, respect in any way. So getting up to speed on the political economy, those are really indispensable books. Okay. I want to thank Laura Kondourajian KCRW, the great public radio station, NPR stations in Santa Monica and Christopher Ho for faithfully posting these shows. Joshua Scheer, our executive producer. Diego Ramos, who writes the introduction at ScheerPost and Max Jones, who helps with the engineering. And I want to thank the JKW Foundation, which in the memory of a terrific writer and public personality, Jean Stein, helps support these shows. So thank you and see you next week with another edition of Scheer Intelligence.
