Call for a New Social Contract with America

Jeff Madrick calls for an end to Friedman-fantasies and a robust government role in rebuilding America.

The social contract of the past thirty years, it is now clear, was based on a serious misconception about the state of the American economy. The financial crisis has now shown that the excessive creation of debt was a major propellant of economic growth. America did not have the new and improved economy so many Republicans and Democrats, not to mention mainstream economists, told us we had.

Because of their mistaken confidence in an unlimited growth potential for the economy, some believed the social contract based on largely free markets, with some modest improvements in the social safety net, was adequate. Whenever I read about a solution to the economic crisis these days, there is invariably an underling assumption that once we are past all this, America will be just fine again. If we get the banks spending, if we stop the mortgage defaults, if we stimulate enough, and if we re-regulate the errant, greedy financial community, prosperity is to follow and most will benefit.

Of course, the current economic emergency is the inevitable result of a narrowly conceived economic model and the failure of Washington’s social contract with America. To save America, that social contract now has to change — and the economic model on which it is based has to be modified.

In the 1980s, the nation abandoned a true social contract with its citizens which once promised, and even succeeded in making, a free-market colossus work justly and prosperously for most through active social programs. The abandonment of that social contract beginning with the Reagan administration was hailed as the re-birth of individualism and America’s gift to the world, ‘limited government.’ It led, however, to rising inequality and a true crisis in wages in America. It also led to tragic neglect of the public goods vital to the citizen’s welfare and the prosperity of the economy. Meanwhile, the nation lived off and ran down the public investment it made from the 1930s to the 1970s.

To be fair, some Republicans must have thought there was a just social contract, but it was largely based on an ingenuous faith—at least among the most sincere of them—in the fantasies of Milton Friedman. Make individuals free to buy, sell and work, especially by relieving them of tax obligations and expensive regulations, and most will prosper, even the poor. But what happened is that incomes and wealth became increasingly unequal; family incomes rose only limb marginally higher even as spouses worked; class divisions based on college entrance became stark; healthcare costs soared,  and many more had no health insurance; the quality of the nation’s infrastructure deteriorated; dependence on dirty fossil fuels rose — and on.

On their end, Democrats bought into this idea to a surprisingly large extent. There were many causes of the Clinton boom of the late 1990s, but perhaps most important were cheap money, speculative stock and housing prices, and a lot of borrowing. As noted, debt covered up the failures of the social contract and the economic model. Borrowing—and hence, the cover-up– was brought to us by a high U.S. dollar, which was the pride of deregulation champions Robert Rubin, then the Treasury Secretary, Lawrence Summers and Alan Greenspan.

As most know today, and some of us knew back then, access to borrowing was the salve that soothed harsh reality. Now overly indebted Americans are paying a large price, losing homes and livelihoods. The debt was the source of enormous of wealth for a small privileged sliver of Americans located on Wall Street, where profits rose to nearly two fifths of all American profits.

Let’s face it. America will not be fine again until we have a new social contract, one that recognizes that high wages are a source of growth and that government must have a robust role in creating prosperity again. That role includes vigilant oversight of financial markets and active investment in infrastructure, energy, education, and healthcare reform. Without these, America’s future prosperity in a global economy is seriously endangered.