This is the edited text of a talk given by LBO editor Doug Henwood at the Studies in Political Economy annual meeting in Ottawa, January 29, 2010.

Greetings from the USA, where a populist rebellion is underway. Let’s take its measure.

First, for a moment it looked like Ben Bernanke faced rough sledding in his bid for a second term as chair of the Federal Reserve. In the run-up to the confirmation vote, a swelling roster of Senators of both parties said they wouldn’t vote for him. Of course, when it was over, he won, 70–30—a squeaker as these things go, but a landslide by any reasonable standard.

One reason for Bernanke’s unpopularity: he failed to acknowledge, much less deflate, the housing bubble back in 2005. Right, up to a point, but had he raised interest rates or cracked down on the availability of mortgage credit he would have faced…a populist outcry. American populists love nothing more than easy credit and rising house prices. But another reason for his unpopularity: pumping billions—trillions, if you’re an aggressive counter—into the financial system after the bubble burst. If he hadn’t done that, we’d all be wearing barrels. He could have done it more transparently and justly, but the principle of pumping aggressively to avert deflationary collapse has been pretty well established since the Fed didn’t do that in the early 1930s. Populists used to love the idea of an elastic currency to prevent depressions, but now that the leading avatars of populism wear teabags on their heads, austerity is their favorite strategy.

Another sign of the populist insurgency is the new tone struck by the Obama administration—hostile to the banks. It’s not for real, but let’s forget that for now. The reason for the populist turn is, of course, the victory by Scott Brown in the special election to fill the Senate seat vacated by Teddy Kennedy. That victory seemed to overturn the laws of nature—the seat had been held by a Kennedy, first John then Teddy, from 1953 through 2009. (There was a two-year interregnum, filled by a placeholder, until Teddy ripened to the Senatorial minimum age of 30.) Imagine the shock when the dull, complacent Martha Coakley, who deemed campaigning on the chilly streets of Boston beneath her, lost the seat that seemed the Democrats’ birthright.

Brown—a man who once posed nude for Cosmo, whose wife appeared in a music video suggestively squirting suntan oil, and whose daughter did a stint on American Idol—isn’t your standard issue Moral Majority-style candidate. But he does appeal to that other strain of populist rebellion, the Tea Baggers (or did—until he betrayed them by voting for a weak jobs bill).

Upsurge! It’s amazing that amidst our worst economic crisis since the Great Depression, most of the dissent is coming from the right. Despite watching 8.5 million jobs disappear, much of the population has been passive while the bankers got billions and the jobless got an average of $305 a week in unemployment benefits—if they were lucky. Unlike the 1930s, there’s been no upsurge of union organizing, plant occupations, or solidarity with those facing foreclosure. Tea Partiers are enraged by the march to socialism being engineered by Barack Obama, particularly through his health insurance reform scheme and $787 billion stimulus program. Never mind that the health insurance scheme was from the first designed to be friendly to the medical–industrial complex, and never mind too that a third of the stimulus program consisted of tax cuts and zero New Deal-style jobs programs. Despite that, the Tea Baggers are setting the political agenda. At first, it seemed odd that the Republicans, despite having lost the 2008 elections badly, had so much influence on political discourse, and despite showing no interest in cooperating with the administration or Con-gressional Democrats, were courted by the Dems. Now it looks like the right wing of the Republican party, or a fringe group that finds the Republicans too establishment, is exerting a weird gravitational pull not merely on speech but also on policy.

Who are these Tea Baggers? They were nicely described by Ben McGrath in The New Yorker as a collection of “footloose Ron Paul supporters, goldbugs, evangelicals, Atlas Shruggers, militiamen, strict Constitutionalists, swine-flu skeptics, scattered 9/11 ‘truthers,’ neo-‘Birchers’ and, of course, ‘birthers’—those who remained convinced that the President was a Muslim double agent born in Kenya.” Though no one has yet done the rigorous sociological work, they look to be a movement of middle managers, professionals, and retirees—the petite bourgeoisie, to use the old language. The classical working class seems more disenfranchised than ever.

Top view. To that pessimistic view of the “grass-roots,” let me add a gloomy diagnosis of our elite. Our rulers have learned nothing from our brush with economic death. The initial response of both the Bush and Obama administrations has been to spend enormous wads of public money on trying to restore the status quo ante bustum. One would like to think that McCain lost the election in November 2008 because he represented that status quo—and that Barack Obama represented, if only in fantasy, a fresh departure. Those hopes have proved misplaced. There’s been almost no effort to stiffen financial regulation to avoid future catastrophes.

Let’s step back to last May, when the chair of the Council of Economic Advisers, Christina Romer, gave a talk at the Council on Foreign Relations in New York, a trade association for the old northeastern Establishment. (See LBO #119 for more.) Romer said that what the U.S. economy needs is a smaller financial sector, higher levels of real investment, and a more equitable distribution of income. She noted that the high consumption days of the U.S. economy were past, and that we needed new sources of growth. Government couldn’t be a fertile source of jobs—after the stimulus, it would retrench. Residential investment was tapped out after the long bubble. Exports weren’t likely to help much, since the rest of the world wasn’t thriving. So it had to come from business investment—mainly green technologies. She was also critical of the growth of finance over the last few decades. She said that “bubbles waste talent”—people who should be doctors, engineers, and teachers end up doing deals instead.

In the Q&A following her talk, an audience member observed that most of the people in the room made their money over the last 20 years on “outsized returns” available in the financial markets. Were they going to have do something different? “Make things,” Romer answered. That evoked a hiss from the audience.

Romer’s exhortations were high-minded, and not without appeal. But her boss has done almost nothing to promote such an agenda. You’re not going to get the sorts of green investment she’s hoping for without massive government involvement, a mix of subsidies and coercion. There’s no way those policies could get through today’s Congress—not that the administration is about to try. There was a little of this stuff in the stimulus bill, but not much, and what was initially proposed got watered down. Republicans and conservative Democrats think that solar power and bullet trains are for citified pansies. Even cap-and-trade, a compromised and Goldman Sachs-friendly approach to reducing greenhouse gas emissions, is dying in the Senate. Popular opinion is hostile to a carbon crackdown. If there were an elite consensus in favor of it, popular opinion could be steamrolled, but there’s no such elite consensus.

And Romer’s touching plea to a roomful of financiers to transform themselves into makers of things died the second she uttered it. Finance is back to making outsized profits and paying itself enormous bonuses. It’s one thing when Wall Street is booming while the rest of the economy is doing sort of OK, as it did in the mid-2000s, or better than sort of OK, as it did in the late 1990s. It’s another thing entirely when the rest of the economy is still bleeding jobs, as it is now. That disparity has provoked a formless rage among the American population, a rage without any constructive outlet—not an unprecedented situation in American politics.

Structures. I see the U.S. as being in the midst of several structural crises. There’s the economic crisis—and not just the immediate one, caused by the housing bust. That was the culmination of a process long in the making. The capsule history would be this. In the 1970s, the American ruling class was faced with several interrelated problems. Abroad, having just lost Vietnam, the U.S faced a crisis of imperial authority. The Third World was demanding a bigger slice of the pie. Oil and other commodity exporters were nationalizing resources. Japanese and European competition was hammering U.S. manufacturing. At home, the streets were full of demonstrators, women and minorities were agitating against white male privilege, and the working class had developed a serious attitude problem. Corporate profitability, which had peaked around 1966, had been drifting lower ever since. From the point of view of the U.S. ruling class, things were slipping out of control.

That class eventually engineered a very successful crackdown. It had several dimensions. First, in 1979, Jimmy Carter, blindly following the recommendation of David Rockefeller, appointed Paul Volcker chair of the Federal Reserve. On taking office, Volcker announced that the U.S. standard of living must decline, and then made it happen. He drove interest rates towards 20%, provoking the deepest recession since the 1930s. That terrified the U.S. working class, and drove Latin America into debt-crisis-induced depression.

Just over a year after Volcker’s ascendancy, voters put Reagan into the White House. Reagan’s major contributions to the class war were firing the striking air traffic controllers, signalling open season on the unions; cutting taxes on the rich, signalling that all social constraints on wealth accumulation were suspended; and rebuilding U.S. military power, signalling that the era of imperial reticence following Vietnam was over.

It all worked splendidly. Unions were broken, wages stagnated, and Latin America was restructured using the club of debt. Corporate profitability bottomed out in 1982 and began a fifteen-year surge. But—and this is a very big but—an economy that was dependent on high levels of mass consumption and a political system that depended on the same thing for its legitimacy had to figure out how to keep spending up while wages were heading south. The answer, as we all know, was debt: household liabilities more than doubled relative to income between 1982 and 2008. The ratio has since come down a bit, but not by much.

So here’s the structural crisis: profitability was restored, but at the cost of fostering unsustainable levels of personal debt. The profit boom and the upward redistribution also gave rise to a gusher of cash that flowed into the financial markets, prompting a proliferation of incomprehensible instruments of mind-boggling vastness. The ratio of financial assets of all kinds to GDP more than doubled between 1982 and 2007. That too has come down a bit, but not by much. The financial sector’s share of corporate profits nearly tripled over the same interval.

False twilight. During the heat of crisis last year, it looked for a moment like that whole model of debt and financialization was on the verge of collapse. Things now look to be going back to what I hesitate to call normal. Debt ratios have picked up a bit, and the financial sector’s share of corporate profits, after falling by more than half, is back to its old highs. Bankers are paying themselves like it’s 2006 all over again. Since the crisis broke out, policy has been designed to get the credit machinery running again, and while it’s not yet ready for the drag strip, it is picking up speed.

A while back, we heard a lot about how the U.S. economy badly needed deleveraging—get debt levels down. But it’s clear that we can’t live with that. Nor can we live with balancing our international books—we still need to import more than we export and borrow the difference. Given the evisceration of U.S. manufacturing over the decades, it’s not clear how we could change that anytime soon; there’s no domestic consumer electronics industry, for example. But even a recession as deep as the one we’ve just been through came nowhere near balancing our current account. The current account deficit did fall by half from its peak, but to a level that was still unsustainably huge.

Failed transformation. The U.S. needs something like the transformation envisioned by Romer, but that’s not happening. Which brings up the next structural crisis: the political and intellectual one. Neither the U.S. elite nor the U.S. electorate is capable of analyzing our problems coherently, much less coming up with solutions, and much much less adopting them. And that’s not just our problem.

For a little while it almost seemed like Obama’s election might represent some sort of departure for the U.S.—a willingness to rethink the stupid verities about minimal government and the vital private sector that we grow up hearing. I never bought the line that he was some sort of progressive, but I did, for a now almost un-recallable instant, think he was a grownup who could prod a maturing country in a more sensible direction. The model wouldn’t have been the New Deal, even—maybe something more like the Progressive Era, meaning a more sensible, organized, regulated capitalism without a major redistributionist component.

But that was not to be. From the first, he was hot for compromise with the party that his had decisively beaten. Why? One reason is that the discursive grip of Ronald Reagan remains unchallenged. For evidence you need look no further than Obama’s State of the Union address—despite making some Romerish noises about necessary transformations, he couldn’t stop from bragging about all his tax cuts and praising the wonders of our private sector. The fact that this private sector’s major innovations—computers, the Internet, pharmaceuticals—have been made possible by very generous public subsidies can’t be spoken in public. And he couldn’t resist closing the address with the phrasing introduced by Reagan: “God bless America.” No public address is complete without invoking our status as the new chosen people.

Actual transformations. That address was a core sample of American political pathologies. In the days leading up to it, the White House assured us that Obama would make a “hard pivot” towards jobs. Sounds not so bad. But how did he go about this? With an ineffectual tax break for small business. Businesses invest when they have the cash and think that their future sales will be strong; neither is the case now. Adding a tax break won’t change this. To help working families, as they like to say, he proposed an expansion of the child care tax credit—which would apply to one in twelve families, to the tune of $0.88 a day.

And on top of those micro-initiatives, he added a dose of austerity: a three-year freeze in domestic civilian discretionary spending. The Pentagon will be allowed to flourish. For the moment, entitlement programs like Medicare and Social Security—which are funded automatically under current law, the opposite in budget-speak from discretionary, which must be funded annually by Congress—will be spared. But much of the good stuff that government does—nutrition, environment, education—will be squeezed. Announcing this, administration officials bragged to the press that the freeze will bring this category of spending down to its lowest share of GDP in 50 years. You can’t fund a Romeresque transformation out of that. And an anonymous administration official told the New York Times that this freeze was intended as a first step in a plan to build political support for an attack on entitlements, meaning Medicare, Medicaid, and probably Social Security as well.

But it’s not just the discursive grip of Ronald Reagan that provokes these things. It’s also the structural situation of the Democratic party—a party of capital that has to pretend for electoral reasons that it’s something else. So Dems make progressive noises to satisfy the base, but once in power, do the bidding of their funders. Sometimes these contradictory tendencies can be seen in one figure, like Obama himself, and sometimes in the wings of the party (e.g. the Progressive Caucus vs. the Blue Dogs). But in both cases, the more conservative faction, whether of personality or party, usually prevails. That’s especially the case when there are no popular movements pushing them in a better direction.

The dominance of business interests in the Democratic Party isn’t some recent, post-Reagan innovation. As a European analyst once put it: “The divergence of interests even in the same class group is so great in that tremendous area that wholly different groups and interests are represented in each of the two big parties, depending on the locality, and almost each particular section of the possessing class has its representatives in each of the two parties to a very large degree…. The apparent haphazardness of this jumbling together is what provides the splendid soil for the corruption and the plundering of the government that flourish there so beautifully.” That was Friedrich Engels writing in 1892. How much of that description would you change today?

Popular concerns. That’s not the whole story. Although a lot of liberals, and even more serious leftists, don’t like to admit it, there’s a deeply conservative streak in the American electorate, and not just the elite. The “common sense”— unschooled instincts imparted by upbringing and inherited ideology—of people in this country is individualist and self-reliant. You see rage expressed through polls and in the media, but, like I said, it’s mostly formless. Sometimes it’s directed at bankers, but sometimes it’s directed at immigrants and the government.

Taking us back to where we started, a major reason for that formlessness is that American radicalism has had a hard time breaking out of the populist mode. That is, it posits a virtuous People being exploited by an often-nameless Elite. But there’s no consistency in identifying the mechanisms of abuse—nothing like the clarity of the surplus value extraction of the classical Marxist model. It’s usually petit bourgeois, directed against both the rich and the poor, often against urbanity—in both senses, the citified and the intellectually polished—and against bigness itself. It often posits a virtuous past of a competitive, self-reliant small-scale capitalism that has been usurped by corporate internationalists, and assumes that even if such a thing had ever existed, it would be desirable to return to that insular world.

The individualistic common sense of the U.S., or at least its white Protestant core, has become increasingly dysfunctional. The U.S. reminds me in many ways of a startup company that’s grown so big that it needs a serious overhaul but is incapable of the necessary transformation. In the corporate example, you frequently see that the founders don’t want to turn things over to professional managers. They want to keep running the show on instinct and animal spirits. But those aren’t working anymore.

So too the U.S. The dog-eat-dog model of social Darwinism worked well (on its own terms) while the U.S. was growing rapidly in the 19th and early 20th centuries, but since growth slowed down in the 1970s, we’ve been in need of a rethink of the old model. But we’re incapable of it. Instead, we’ve tried ever more reckless applications of debt to keep things going.

The recent financial crisis looked like a major affront to that approach, but we’re now emerging from the crisis phase without things having changed all that much. The country seems to be rotting from within, but the political and ideological systems are incapable of recognizing that fact. I wish I could detach myself from the consequences and find it all amusing, in the style of H.L. Mencken. But I can’t. Now I’ve got a kid who was born into this nuthouse, so I take it all more personally. I hope we can get our act together and make this a less brutal place. But it’s hard to get hopeful. I guess this is what it’s like to live in the midst of imperial decline.