The Crash of 2016

by Thom Hartmann

The two men knew each other very well; they spent many nights perched atop the roof of the King’s College chapel amid German bombing raids during the height of World War II. As the Germans dropped firebombs onto England, Keynes and Hayek were given the task of disposing of, armed only with shovels, any bombs that might land on the chapel before they could be detonated. Keynes was over sixty years old at the time, and Hayek was in his forties—neither man was really qualified for the job. But luckily, they never needed to use their bomb shovels.

  Hayek promoted what was called neoliberalism, an economy based solely on free markets. Yes, despite the catastrophic economic damage caused repeatedly by unrestrained free markets, wealth inequality, and dismantled social safety nets, those promoting this destructive ideology never gave up.

  Neoliberals like Hayek believed that markets free from democratic intervention could somehow make everyone richer and create an economic utopia, and this belief persists despite its failure everywhere it’s been tried around the world.

  The neoliberals were overwhelmingly rejected around the world after the last Great Crash and war—banished to the fringes of economic thinking. But, from those fringes, they plotted their comeback.

  The Mont Pelerin Society

  In 1947, two years after the war ended, Friedrich Hayek gathered a large group of economists, historians, journalists, and businessmen to a meeting in Mont Pelerin, Switzerland.

  A man named Milton Friedman was one of those economists in attendance.

  He’d graduated high school almost twenty years earlier, in 1928, one year before the stock market crash, and received his college education at Rutgers University and the University of Chicago during the height of the Great Depression.

  Friedman was the first member of his family to go to college, and the economic upheaval under way in America motivated him to study economics. As he said, “Put yourself in 1932 with a quarter of the population unemployed. What was the important urgent problem? It was obviously economic and so there was never any hesitation on my part to study economics.”44

  Out of school, Friedman went to work for Franklin Roosevelt’s New Deal government, first for the National Resources Committee, then the National Bureau of Economic Research, and then the Treasury Department. At the time, he believed in the New Deal in a broad sense, and in the Keynesian economic theory underpinning it.

  But after the war, as the Great Crash twenty years earlier began receding from collective memory, Friedman found himself drawn to Hayek’s religion of free markets.

  And so he was on hand in 1947 for the first meeting of what would be known as the Mont Pelerin Society. The purpose was clear. Hayek saw the momentum building around the world for socialist revolutions and more control of markets, and he wanted to cut it off.

  Friedman described this meeting, and his tone foreshadows the tone used in an infamous twenty-four-years-later memo by Lewis Powell.

  “The point of the meeting was very clear,” said Friedman. “It was Hayek’s belief, and the belief of other people who joined him there, that freedom was in serious danger.”45

  The reason, Freidman said, was because “during the war, every country had relied heavily on government to organize the economy, to shift all production toward armaments and military purposes. And you came out of the war with the widespread belief that the war had demonstrated that central planning would work.

  “And so there were strong movements everywhere,” said Friedman. “In Britain a socialist [Clement Attlee] had won the election. In France there was indicative planning that was [in] development. And so everywhere, Hayek and others felt that freedom was very much imperiled, that the world was turning toward planning and that somehow we had to develop an intellectual current that would offset that movement.

  “Essentially, the Mont Pelerin Society,” said Friedman, “was an attempt… to start a movement, a road to freedom as it were.”

  But what Hayek was unable to do, mainly because he was operating with the catastrophic consequences of his free-market philosophy still fresh in everyone’s mind, Friedman would do—and that’s lead a global counterrevolution against controlled capitalism, and in particular against the New Deal.

  He took Hayek’s message to his alma mater, the University of Chicago, where he and other free-marketeers would banter among themselves in an echo chamber while the rest of the world forged ahead with successful “socialized” economies.

  But the “Chicago Boys,” as they would soon be called, led by Milton Friedman, would be ready at a moment’s notice to reintroduce neoliberalism to the world. He just had to be patient and wait for the Great Forgetting—or a crisis.

  Shock Troopers

  In his 1962 book Capitalism and Freedom, Milton Friedman wrote about crises.

  “There is enormous inertia—a tyranny of the status quo—in private and especially governmental arrangements.”46 That “status quo” he was referring to was Kennedy’s America when the middle class was on the rise and our nation was the envy of the entire non-communist world.

  “Only a crisis—actual or perceived,” Friedman wrote, “produces real change.”

  Friedman was a crisis guy. He knew how transformational crises could be, and exploited them any chance he got. As he wrote, “Our basic function… [is] to develop alternatives to existing policies, to keep them alive and available until the politically impossible becomes politically inevitable.”

  Naomi Klein, in her book The Shock Doctrine, chronicles Friedman’s exploitations of crises to promote free-market capitalism. “Some of the most infamous human rights violations of this era, which have tended to be viewed as sadistic acts carried out by undemocratic regimes,” Klein explains, “were in fact either committed with the deliberate intent of terrorizing the public or actively harnessed to prepare the ground for the introduction of radical free-market ‘reform.’ ”47

  These so-called free-market reforms promoted by the members of the Mont Pelerin Society and later the Chicago Boys do not constitute a legitimate economic theory, as they’ve never worked anywhere they’ve been tried, anywhere in the world. They constitute a religion.

  Yet this religion actually serves as the intellectual underpinning of the Economic Royalist plan for society. And it would seem to be the spear tip for reclaiming power by the Economic Royalists.

  Their first opportunity came in Chile in 1973.

  General Augusto Pinochet outsourced the work of building a new economy in Chile to Milton Friedman and the Chicago Boys.

  Friedman’s “Chicago Boys” were eager to help General Pinochet in Chile. It was their first big gig, and Milton Friedman went to Chile with a plan to radically remake the depressed economy.

  They would immediately privatize government industries, cut spending, and open up Chilean markets to free trade. No more Keynesian economics, in which the government kept greed and monopoly under control: The Chicago Boys handed the millionaires in Chile the golden key to the country’s treasury and said, “Get to work.” There would be no gradual repairs. The Chicago Boys would simply sink the ship and build a new one.

  As a result, the Chilean economy collapsed (as has happened every time this sort of thing has been tried, anywhere in the world, throughout world history), and this time there was no longer a social safety net to help people. The unrest in the country grew, and so did the violence.

  But to the Chicago Boys, this was all part of the plan. They knew reforms would be painful, and for them it was “no pain, no gain.” But the Chicago Boys had a different definition of “no pain, no gain” and it went something like this: If the vast majority of the population doesn’t experience the pain of immediate economic reform, then the very few people who make up the wealthy elite won’t see their gain of massively greater wealth.

  Orlando Letelier was a diplomat and economist who escaped Pinochet’s bloody coup in Chile and fled to Washington, DC. In 1976, three years into the Chicago Boys’ experiment in Chile, Letelier penned an article in The Nation entitled “The
Chicago Boys in Chile: Economic Freedom’s Awful Toll.” As the title suggests, Letelier exhaustively outlined Friedman’s failures in his home country.

  Letelier points out that, two years into Pinochet and the Chicago Boys’ rule, inflation had reached 341 percent—higher than anywhere else in the world. The price of goods increased by 375 percent. GDP decreased by 15 percent. Agriculture production sputtered to a grinding halt. Export values dropped 28 percent and Chile acquired a $280 million trade deficit. And to top everything off, Chile’s unemployment rate skyrocketed from 3 percent—among the lowest in that hemisphere—before Friedman stepped foot in the country to more than 10 percent and, in some parts of the country, as high as 22 percent after Friedman left.48

  Letelier concluded by writing, “Three years have passed since this experiment began in Chile and sufficient information is available to conclude that Friedman’s Chilean disciples failed.”

  But judging the success of an economy based on economic indicators isn’t how the Chicago Boys rolled. They judged success another way, as Letelier indicated: “But they have succeeded, at least temporarily, in their broader purpose: to secure the economic and political power of a small dominant class by effecting a massive transfer of wealth from the lower and middle classes to a select group of monopolists and financial speculators.”

  All of these economic pains took place under the backdrop of a dictator willing to kill anyone who showed the slightest opposition to Friedman’s economics. And that included Orlando Letelier, who was assassinated in 1976, when a Pinochet hit squad rigged his car with a bomb.

  Despite the wave of violence and abysmal economic indicators, the Chicago Boys were happy with what they accomplished. It would be a common theme elsewhere around South America and the former Soviet bloc, as so-called crises were exploited and new economies “of, by, and for the rich” began to develop under the guidance of the Chicago Boys and others who subscribed to Friedman’s economic “shock therapy.”

  According to the criteria of the Economic Royalists, Friedman’s Chilean experiment was a resounding success. And with the Great Forgetting taking hold, the corporatist intellectual community around the world was warming up to the same old Royalist policies that had wrought so much pain generations earlier.

  A Global Shift

  Just as Friedman was busy running the nation of Chile into the ground in 1974, his mentor, Friedrich Hayek, emerged from the shadows to be recognized by the central bank of Sweden with their Nobel Prize for Economics.

  The bank intended to solely honor Swedish socialist Gunnar Myrdal. Myrdal is perhaps best known for his book An American Dilemma: The Negro Problem and Modern Democracy, a book written about race relations in America in 1944 that would serve as the basis for the US Supreme Court’s decision in the Brown v. Board of Education case.

  But the bank feared that it would be criticized for “home cooking” by selecting a fellow Swede, so they threw Hayek into the ceremony as well. That decision didn’t sit too well with many in the global economics community, including Myrdal, who thought of Hayek, with his free-market ideology, as a radical wingnut. As did most people at the time.

  But Daniel Yergin, author of the book Commanding Heights, recounts this story and sheds some light on its significance saying, “[T]he award documented the beginning of a great shift in the intellectual center of gravity of the economies profession toward a restoration of confidence in markets, indeed a renewed belief in the superiority of markets over other ways of organizing economic activity.” Yergin noted, “Within a decade and a half, the shift would be largely complete.”

  Two years later, the Nobel economics prize was awarded to Milton Friedman alone in 1976. The changing of the guard was complete.

  As with Hayek’s coronation, no one was happy with the decision to honor Milton Friedman that year. Chile was in chaos, and tens of thousands had been murdered at the behest of Pinochet. As a result, Sweden was flooded with protestors condemning Friedman and the Swedish Central Bank.

  Friedman’s wife, Rose, recounted the couple’s trip to receive the award in a 1998 article entitled “One Week in Stockholm,” which ran in the Hoover Digest. Rose describes a hostile environment in which she and her husband were under constant threat. She wrote, “From that moment until we left, we were never without our two bodyguards. In addition, our room was under surveillance day and night by other police. Not even a maid, we discovered, was permitted to enter our room without a police escort!”49

  Former recipient of the prize Gunnar Myrdal, who had shared the honors with Hayek two years earlier, was appalled and called for the abolishment of the Swedish Bank’s Nobel Prize for Economics.

  But despite all the grievances, the neoliberalism movement was now afoot and had gained legitimacy—and the Royalists were thrilled. As Daniel Yergin noted, “a great shift” was now under way.

  Three years later, Margaret Thatcher, a devout follower of Friedman’s economic philosophy, would rise to power in the United Kingdom, deregulate her nation, open up the markets, and cut government spending.

  The “Crisis” Comes to America

  My wife, Louise, and I had moved to Detroit in the summer of 1973 so I could take a job with RCA that offered health insurance, as Louise was pregnant with our first child. We lived in Westland, a western Detroit suburb on the glide path to the Detroit airport, in a tiny rented house.

  In early October 1973, Egypt (with the help of Syria) attacked Israel in what is now known as the Yom Kippur War. Israel fought back and routed their opposing forces, taking large chunks of Egyptian land during the Six-Day War. Because the United States was backing Israel, the Arab world was outraged, and a couple of weeks after the October 6 attack, OPEC’s ministers met and announced they were cutting off their exports of oil to the United States and a few other countries. That embargo lasted until March 1974, although its effects continued to echo for years.

  In no particular order, I remember President Nixon announcing rationing and asking gas stations to close on the weekends. In December 1973, the month our first child was born, I was working really hard at keeping the gas tank of our van filled, because the hospital was miles away in the more upscale Detroit suburb of Livonia, and finding gas was getting harder and harder. There were long lines, and some stations were closed altogether.

  A strike by truckers had further disrupted gas supplies, and also led to supermarket shelves being emptied. Fights broke out at gas stations, as we had to wait in line for hours to get gas. I remember sitting in our van one day after work (when the lines were particularly long) for about two hours when two guys ahead of me got out of their cars to engage in a fistfight. The news told stories from around the nation of people firing guns, although I don’t think anybody was actually shot.

  Even though we had no money in the stock market, it was impossible not to notice the news screaming, in January 1974, about how the Dow was collapsing. During the next eleven months, it lost almost half its value. Businesses were failing all across the country, and retirees who’d put their savings into the stock market were wiped out.

  This crisis persisted through the late 1970s, plaguing President Jimmy Carter’s first term. Under the pressure of economic hardship, doubts crept into the American psyche. People questioned whether the institutions born out of the New Deal were now failing and new institutions had to be built.

  The Powell Memo had organized the business class under Royalist principles, while neoliberalism as promoted by the Mont Pelerin Society and the Chicago Boys had brought the political and economic class in line with the Royalists.

  Carter was crushed in the 1980 election. Ronald Reagan rose to power and brought Milton Friedman on as an economic adviser.

  The sun had set on an era of Keynesian stability and New Deal economics that benefited the middle class. The 1970s crisis-induced crack in the national psyche was just big enough for Ronald Reagan and the neoliberal shock troopers to step through it and carry forward an Economic Royalist revolution
to tear down everything.

  The long fuse to the Crash of 2016 was lit.

  PART 2

  Why We Crashed

  Chapter 4

  A Middle-Class Primer

  Communism is a hateful thing and a menace to peace and organized government, but the communism of combined wealth and capital, the outgrowth of overweening cupidity and selfishness, which insidiously undermines the justice and integrity of free institutions, is not less dangerous than the communism of oppressed poverty and toil, which, exasperated by injustice and discontent, attacks with wild disorder the citadel of rule.

  —President Grover Cleveland, 1888

  State of the Union Address

  Before we get into how exactly Ronald Reagan and the Economic Royalists set out to destroy the middle class and, thus, set up the next Great Crash, we have to understand how a middle class is created in the first place.

  A big shift happened in America during my grandfather’s life, which enabled my father to have a life that was unavailable to most of my grandfather’s peers. My dad had the good fortune of coming of age in the late 1940s and early 1950s, when the New Deal and the GI Bill were in full effect.

  It took the leadership of FDR for government to again play a role in creating a middle class. If the average person—not just the skilled tradesman or the college-educated or the businessman—but the average person was to have the American Dream of a middle-class life, it would take more very specific interventions by government.

  After my dad graduated from high school and came back from two years in Japan right after World War II, if there had not been explicit policies put into place by FDR, Harry Truman, and Dwight D. Eisenhower, he would have faced the very real possibility of being one of the working poor for the rest of his life.