What Steve Bannon & Tech Bros Get So Wrong about What Made America an Economic Powerhouse

What Trump's advisors don't know about how the American economy works could kill it

Matt Stoller has an interesting new post up, ““Monopoly Round-Up: New Deal or Crime Spree?” on his excellent Substack about the latest suggestions from Trump Advisor Steve Bannon, aiming for a “1932-style realignment,” of the economy.

Stoller cites an an interview with Dave Weigel:

To Bannon, the second election of Donald Trump “is a 1932-type realignment, if we do this right. Look at the demographics that got us here – black, Hispanic, white, working class, all of it. If we deliver for these people, and I mean deliver in a big way economically, then this is a coalition that could last for 50 years.”

That, of course, is a big if. Weigel pressed him on what it would mean to deliver, and Bannon said that the GOP has to change. “In President Trump’s house, there are many mansions. You’re going to see a fight from the populist right.” He seeks to “break that mindset that stock buybacks are fine, that crony capitalism is fine, and the tax breaks for the corporations are fine.” If that doesn’t happen, then the GOP will “squander a unique moment in history.”

The “political realignment of 1932” was when FDR and the Democrats brought in the New Deal, which included public investments in jobs and infrastructure, it also had a strong anti-corruption element to deal with the legal fraud, theft, scams and reckless risks that collapsed the U.S. economy and led to people losing everything.

This is a repeat of what Bannon said eight years ago. In November 2016, Buzzfeed posted a long transcript about Donald Trump’s advisor and Breitbart Publisher, Steve Bannon, claiming to show his “real world view”.

It didn’t make sense then, and it doesn’t make sense now, because the promises of the incoming Trump administration are, very clearly completely the opposite, with a commitment to massive, deficit-funded tax cuts, and either eliminating regulations and regulatory bodies, laws and oversight.

With political figures, it is always difficult to know whether they are tailoring their comments to an audience in order to be persuasive or whether it is a true expression of their views, even in private.

Bannon is clearly a provocateur who likes the idea of playing the villain. He has described himself as a “Leninist” who wants to burn down the establishment, and told the Hollywood Reporter that “darkness is good,” citing Dick Cheney, Darth Vader and Satan.

This is partly a troll revelling in being a troll - the pleasure in saying things that wind up opponents and making them miserable.

[Brief digression: The amplification, elevation and encouragement of people who revel in the misery of others is one of the most loathsome consequences and utter failures of the internet.]

They’re odd choices, and if you take a moment to think about it, Cheney, Vader and Satan aren’t exactly known for their winning track record.

This might seem trivial, but it’s symptomatic of bigger problems for Bannon and others in Trump’s orbit: their understanding of serious issues and historical events is also incredibly shallow.

The 2016 transcript shows Bannon in a different light, not least because his audience includes a Catholic Cardinal. Bannon is more thoughtful and critical, especially of crony capitalism and Ayn Rand-style libertarianism - which may be surprising to some. He sidesteps concerns about extreme nationalist elements of right-wing movements that people have found so appalling, describing himself as an “economic nationalist.”

In the blizzard of contradictory information that is the new Trump administration, Bannon seems to have suggested that the government would borrow to run a large deficit (since interest rates are so low) and spend hugely to stimulate the economy - steel mills, shipyards - “like the 1930s” as he put it.

Such a Keynesian stimulus could potentially work, but is completely at odds with the announced plans of the GOP and oligarchs in finance and tech. Back in 2016, $10.5-trillion in cuts from the Heritage Foundation were being promised.

It’s easy to get caught up in Bannon’s other statements, but his view of economic history demands closer examination:

“The underlying principle is an enlightened form of capitalism, that capitalism really gave us the wherewithal. It kind of organized and built the materials needed to support, whether it’s the Soviet Union, England, the United States, and eventually to take back continental Europe and to beat back a barbaric empire in the Far East.

That capitalism really generated tremendous wealth. And that wealth was really distributed among a middle class, a rising middle class, people who come from really working-class environments and created what we really call a Pax Americana. It was many, many years and decades of peace.”

This history is totally inaccurate.

It certainly wasn’t capitalism alone that defeated Nazi Germany, it was governments and the military, including the USSR, which was definitely not capitalist. More than 20-million soviet citizens died in the Second World War repelling the German invasion.

It is also important that while we cannot discount imperial and colonial trade and commerce, the “free market” way of framing how to encourage economic growth has distorted our perspective, because it treats economic growth that only happens when money flows from some outside jurisdiction.

Businesses, investments and jobs are considered something you attract from somewhere else. To attract outside or foreign investment, the usual recommendations are lower taxes, less regulation, shrinking spending and government, lower trade barriers. The idea is that the money has to come from somewhere else - not government, for example. It is a way of insisting that the only people who can solve the problem are private investors (sometimes foreign investors) and not government.

These ideas are repeated so often we become convinced they are right. It is a set of rules that describe the only permitted way that ideologues will accept, which we know because economic history contradicts it.

No wealthy country ever became wealthy in this fashion. Every wealthy country did so by pursuing a policy of protectionism: the U.S., Canada, Great Britain, Japan, South Korea. It used to be called “mercantilism”. Countries might have tariffs or shelter their own industries, or have some kind of industrial policy where the government assists in developing the economy.

This is also relevant to the economic relationship of these countries with colonies. The argument, and perception of colonized countries is often that colonisers became rich based on wealth extraction, which is not the whole story, because the wealth was also being driven by manufacturing exports. In the 1800s, Great Britain was producing 50% of all manufactured goods. In the 1900s, the U.S. was producing 50% of all manufactured goods.

The industrial development began, and ran, long before these countries developed into significant colonial powers. That means one of the flows contributing to the wealth was money for finished goods - not just raw materials. These countries were also making an effort to restrict the export of technology for manufacturing or weapons-making - which still happens today.

The question “how do we create wealth within an economy” has always had a simple answer: investment - and not just private investment.

The US and the UK didn’t become successful with minimal government - they were strong governments who played a role in supporting and protecting important and strategic industries.

But it should be clear that within an economy, you can create new businesses, and develop innovations which create value as some new improvement on:

• Fire (heat/light)

• The wheel (transportion)

• Writing (communication)

• Medicine

• Agriculture (food

• Weapons

• Protection/defense.

If you can suddenly get much more value of out of less effort, or improved output, efficicacy or design, you can create value and build wealth within your community. If the money for investment always has to come from somewhere else, where did they get it?

The idea of public investment “crowding out” private investment is also wrong. Public investment “crowds in” private investment.

There are completing explanations for what caused the Depression, as well as explanations of how the U.S. shook it off.

In the 1920s in the 1920s, there had been an extended period of very-low interest rates which had led to a huge increase in access to credit. This helped drive a debt-fuelled stock and real estate boom (exactly as today). Industrial investment was slumping, and the federal reserve increased interest rates (also, exactly as today). The stock market crashed in 1929, wiping out thousands of U.S. banks, business, commodity prices plunged, wiping out farmers, industrial activity, etc.

The response and recommendation of Treasury Secretary Andrew Mellon was to

“Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate. It will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up from less competent people.”

Neoclassical economists like Ben Bernanke blamed bad central bank policy, (correctly).

The New Deal has several phases. Part of it was running deficits to stimulate the economy, bringing in new protections for labour, putting people to work, and building public infrastructure projects.

Another part of it was an investigation into what had happened and bringing in new laws and regulations to prevent it from happening again. While bankers railed against FDR, he said he “welcomed their hate.” Those legal measures included setting up legal firewalls and barriers to prevent failures and contagion. Some of these barriers were eliminated in the 1990s and contributed to the 2008 crisis.

Of course, there were critics of the New Deal at the time, and the entire current neoclassic economic orthodoxy argues that it was wrong.

So do “Austrian” economists (Mises) as well as libertarians like Murray Rothbard argued the interventions did more harm than good.

The argument that Rothbard and others have made is that the New Deal made the Depression worse by intervening in the economy, due to their profound, evidence-free belief that, like Mellon, if you just let the price of everything drop low enough - prices, and labour - they will eventually bottom out, and businesses will eventually be able to start hiring and people will be able to buy again.

A couple of things worth noting that Rothbard’s work. One is that it was relegated to “fringe” status in academe.

His work was publicized and won favour, not because they are accurate, but because he was working with billionaire-financed think tanks, making economic claims that, coincidentally enough, not only endorsed but justified them policies that would steadily add to the wealth of billionaires as necessary and good for everyone.

Rothbard is also one of the influences behind the views of Curtis Yarvin, who is an influential figure on certain Silicon Valley figures, including Peter Thiel.

The Rothbard influence is important, in part because he worked with Ron Paul on blatantly racist newsletters, which went out to a mailing list that Paul had originally obtained from white supremacists.

The outreach to white supremacists was deliberate.

“The most detailed description of the strategy came in an essay Rothbard wrote for the January 1992 Rothbard-Rockwell Report, titled "Right-Wing Populism: A Strategy for the Paleo Movement." Lamenting that mainstream intellectuals and opinion leaders were too invested in the status quo to be brought around to a libertarian view, Rothbard pointed to David Duke and Joseph McCarthy as models for an "Outreach to the Rednecks," which would fashion a broad libertarian/paleoconservative coalition by targeting the disaffected working and middle classes. (Duke, a former Klansman, was discussed in strikingly similar terms in a 1990 Ron Paul Political Report.) These groups could be mobilized to oppose an expansive state, Rothbard posited, by exposing an "unholy alliance of 'corporate liberal' Big Business and media elites, who, through big government, have privileged and caused to rise up a parasitic Underclass, who, among them all, are looting and oppressing the bulk of the middle and working classes in America."

Now, just to make the point that this argument was made in 1992 - that the complaints about “liberal corporations” was occurring at a time when there had been 12 years straight of Republican presidents.

The reality of the Depression (and serious economic downturns) is that distress is intense, and in the 1930s, people were literally starving to death.

Mises and Austrian economics in the U.S. is deeply grounded in neo-confederate attitudes that are directly related to the history of slavery, the civil war and civil rights.

The Austrian objections to “big government” coming for your property sidesteps the issue that the property was other human beings. These are not arguments for American success: these are the long-standing grievances of people who lost the civil war, being imposed on the U.S. Government in retaliation.

The experience of the Koch family, who fund the promotion of these ideas through thinktanks is also notable. Fred Koch was a chemist who developed a new way of cracking oil for refining, but was stymied in applying it by business interests in Texas. Instead, Koch sold his technology and built refineries for Nazi Germany and Stalin’s Soviet Union. In fact, Koch built several refineries for Stalin, while the Soviet Union was trying to replicate Great Britain’s industrialization, right down to the trickle-down economics, except the communist state collected all the surplus, not capitalists.

Koch’s change of heart towards communism came then some of his Soviet business associates were liquidated. Back in the states in the 1950s, he was a founding member of the John Birch society, decrying the disaster of communism.

Ever since, the Koch family have pushed their libertarian views, including through Reason magazine, which in the 1970s defended South African apartheid on the basis of “freedom”.

What actually turned things around in the 1930s

The Depression was followed by “the Great Compression” - a period between 1938 and 1945 which is the only time in history inequality in the U.S. actually got better. Massive government intervention and investment cured the Depression, drove the post-war “golden age of capitalism” as well as the Pax Americana.

Did private industry play a role in building the war machine for WWII? Of course. But it was ordered and paid for by the U.S. and other governments. The US ran a control economy, with wage and price controls. Food, fuel, coffee, sugar and rubber were all rationed, and every scrap of metal was recycled to be used strategically for the war effort. Unemployment went down to 2%, but while inflation was high, wages went up by 80% in just four years. By 1945, when the controls were lifted, the average American worker was saving 20% of their income.

To get an idea of the scale of investment during WWII, the private capital tool stock of the US was doubled, at government expense. Add to that investments in R & D and new technologies originally for military use- the jet engine, radar, electronics, computing, nuclear and medical technologies, all of which were later commercialized.

The “Pax Americana” started with a decision on the part of the Allies not to repeat the mistake of the Treaty of Versailles and the First World War, when victors’ justice imposed terrible costs of reparations on Germany. John Maynard Keynes quit the Versailles negotiations with a warning the terms would start another war in twenty years - he was right.

The Allies launched a Marshall Plan to help Germany and Europe rebuild. The so-called “Golden Age of Capitalism” saw the highest growth the world has ever seen, between 1945 and 1975. It was defined not by laissez faire capitalism, but the welfare state and the “mixed economy.” Could GM have sold as many cars if governments weren’t building freeways and Interstate Highways in the 1950s?

In the 1970s, neoliberal, free-market, anti-government policies first took hold, and an alt-history of prosperity was developed instead. Think tanks, economists and politicians all railed that government can do only harm and that it has warped the free market and created all the ills in society - even poverty. But growth since 1980 has been worse than it was during the mixed economy.

It used to be understood, and accepted that markets generated both wealth and inequality, and that government could not only curb the excesses of capitalism, but amplify its benefits. This idea has been lost. It is taken as an article of faith that government is inefficient and wasteful, and that regulation and taxation are costs without benefit. All this despite, by - even though the TARP bailout of 2008, in the estimation of economist George Akerlof, prevented $75-trillion in losses.

Billionaire libertarian Peter Thiel, who is on Trump’s transition team, wrote that the gilded age of the 1920s were the peak of “democratic capitalism,” which he argued has been in decline ever since, in part because women got the vote. Others, like the Koch brothers, look back on the 19th century robber barons as the peak for America.

In this sense, economic libertarians and followers of Ayn Rand are like anti-vaxxers, but for democracy and the rule of law.

As we have seen with automation, an industry that replaces workers with machines can continually expel more workers and make more money with less.

Government itself is not just a burden and a cost: it is a kind of insurance company that helps cushion both the private sector and the population from catastrophic failures. We don’t pay taxes like paying for goods at the store: we pay taxes so government is there when we need it.

This lowers costs and allow greater risk-taking, because it does things that the market does not. One of the ways you increase certainty and lower risk is through back-ups and reinforcement: this is what government and good regulation can provide.

The Public Interest

It is common for people to denigrate anyone working in the public sector, and claim that the private sector makes or does things in ways that are better or more efficient.

This is partly because as a matter of ideology, all private market failures are blamed on the public sector, or private sector failures and crises and bailouts are completely ignored.

Part of the reason for the effectiveness of the private sector, and the challenges of the public sector, is precisely that a private organization pursues private goals.

The private interest is fundamentally different than the public interest.

Taxes are not just the price we pay for civilization: markets can’t exist without the existence and enforcement of property rights and contracts. Transparency is never enough: we need independent courts with the authority to settle cases and enforce rulings. This role of the law is often a blind spot for libertarians and even some economists, who argue that taxes are theft or extortion: without laws and a legal system that is paid for by taxes, you can have no property, theft, or extortion.

The 2016 Trump administration announced $1-trillion in infrastructure spending, tax cuts worth $9.5-trillion and rumoured budget cuts of $10.5-trillion over ten years.

Very different constituencies will benefit from these measures: the richer you are, the bigger the benefits of the tax cuts.

Reducing the U.S. Federal budget by $1-trillion a year will pull that much out of the U.S. economy - equivalent to firing more than 20-million people making an average income of $50,000 a year. This is a consequence of seeing government only as a cost - when public and private spending together define the national income.

How big tech billionaires have government to thank for the technology that made their fortunes

Since the 1960s and 70s, Silicon Valley has always been a strange, perfectly American combination of the military-industrial complex and a slightly hippie-inspired counterculture.

When Steve Jobs quoted “Stay Hungry, Stay foolish” it was from the Last Whole Earth Catalog, which combined counterculture ideas - back-to-the-land, organic food, yoga, psychedelics and more - with a DIY explosion in tech, from calculators to circuit boards. There was still a “collective” or communal aspect that has continued with shareware and “Creative Commons.”

These cultures and ideas, many of them flaky, annoying and delusional have continued to inform the culture of tech to this day, largely because the “military industrial complex” and vast public investments in R & D have been written out of the story.

Economist Marianna Mazzucatto wrote an outstanding book, “The Entrepreneurial State” which asked the question, why did the U.S. develop have global tech companies like Google, Facebook, Youtube and Amazon, when Europe did not.

The answer was that the development of an incredible number of key innovative technologies - including their development at private companies, were financed through public, not private expense.

XEROX, the copying and print company, had an outfit called PARC, or the Palo Alto Research Centre. They developed a lot of key technologies that were eventually commercialized by Apple. Xerox opened PARC in 1970, hiring the greatest minds in the field to research advances in computer science.

PARC innovations included a Graphical User Interface (GUI), the mouse, windows, drag and drop interactions.

The product that turned Apple into multi-trillion dollar company was the iPhone - which was preceded by the iPod.

This is a graphic showing all of the “Defense Advanced Research Projects Agency” (DARPA) patents that are used in the first touch-screen iPod/iPhone (and iPads to follow).

The technology and the credit for the agency that developed it:

First Generation iPod

• DRAM cache - DARPA

• Click wheel - RRE, CERN

• Lithium-ion batteries - Department of Energy (DOE)

• Signal compression - Army Research Office

• Liquid crystal display - National Institutes of Health, National Science Foundation, Department of Defense

• Micro hard drive - DoE / DARPA

• Microprocessor (CPU)

Second Generation Ipod / iPhone

• Multi-touch screen - DoE, CIA/NSF, DoD

• NAVSTAR-GPS - DoD / Navy

• SIRI - DARPA

• HTTP/HTML - CERN (Europe)

• Cellular technology - US Military

• Internet - DARPA

In addition, Apple had the following

1. Direct Equity Investment - Government funding: Prior to IPO, Apple received $500,000 from Small Business Investment Company licensed by a U.S. Federal Agency

2. Access to Research funded by state or federal governments - Military, academic, private-public partnerships

3. Tax, trade and tech policies to support innovation for Apple or drive market share

Microprocessors, which were developed in 1950s and 60s by Bell Labs, Fairchild Semiconductor and Intel, only had one customer to sell to - the U.S. Government. The only customers at first were NASA and the Air Force (for nuclear missiles).

Private Investors Were Often Too Risk-Averse

The reason for the public financing was that private corporations and investors were not willing to take the risk.

The idea behind the Internet was the idea that decentralized communications were important in the event of a nuclear war

“during the Cold War era, US authorities were concerned about possible nuclear attacks and the state of communication networks following the after aftermath of possible attacks. Paul Moran, a researcher at RAND -an organization with its origins in the US Air Force's project for research and development or rand for short recommended a solution that envisioned a distributed network of communication stations as opposed to centralized switching facilities.”

Although DARPA approached AT&T and IBM to build such a network both companies decline the request believing that such a network was a threat to their business.

Instead, DARPA partnered with the British Post Office to build a network stations from the west to the east coast

From the 1970s through the 1990s DARPA funded the necessary communication protocol TCP/IP, operating system UNIX and email programs needed for the communication system all the National Science Foundation NSF initiated the development of the first high-speed digital networks.

Tim Berners-Lee developed HTML, URL and HTTP at CERN, which is the European science research agency.

So-called “Thin-film transistor” displays - are today used and seen everywhere in television sets, computer monitors, mobile phones, handheld video game systems, personal digital assistants, navigation systems and projectors.

The major breakthrough in LCD technology came about during the 1970s when the thin film transistor TFT was being developed at the laboratory of Westinghouse under the direction of Peter Brody. The research carried out at Westinghouse was almost entirely funded by the US Army.

Companies that were asked whether they would invest in TFT included Apple, Xerox, 3M, IBM, DEC & Compaq. They all said no. In 1988, after receiving a $7.8 million contract from DARPA, Brody established Magnascreen to develop the TFT LCD. This advancement in LCD technology became the basis for the new generation displays for portable electronic devices.

Not a single one of the tech companies that have minted so many billionaires would exist if it weren’t for the fundamental investments in research and development.

This goes back to the development of information theory and cybernetics by Norbert Weiner and Claude Shannon, as well as computing in the UK with Alan Turing.

The investment that made the breakthroughs possible were paid for by government. Cybernetics was developed as part of an automatic targeting system for anti-aircraft guns. Turing’s development of a computer was to crack German submarine codes.

So called “Web 2.0” tech companies exist, and can generate incredible profits, because they are legally exempted from liability that apply to other corporations and individuals. The Milennium Copyright Act includes a section that protects companies from being held responsible for content users post to a website that might be illegal, stolen or that violates civil or criminal laws.

Facebook, Youtube, Google, X, Spotify - these are all companies that have made billions by taking other people’s intellectual property and paying them little or nothing for it. That is now happening, again, with AI, where the entire scannable content of the world is being sucked up by companies who will sell products based on the previous work of people not being compensated.

E.B White said “Luck is not something you can mention in the presence of self-made men.”

Apparently the fact that the government funded all the actual innovation that created the entire sector is also not something you can mention.

Bannon, Musk and Thiel are not stupid people, but that does not mean they know what they are talking about, partly because the theories and histories they are relying on are one-sided.

I’ve written earlier that the problem with the U.S. and global economies is that we are in a giant asset bubble that is popping, and it has not hit the U.S. yet.

We are looking at a 1929 collapse in value, and while Elon Musk may salivate at the prospect of driving the U.S. into liquidation so that he and his fellow plutocrats can buy even more valuble industrial assets at fire-sale prices, quite literally everyone else in the U.S. and many people around the world should be aware of the catastrophically dangerous risks the Trump administration is proposing.

Aside from the inevitable contagion, we are talking about an economic event that would send shockwaves around the world, which could affect the U.S. standing as the global reserve currency - on which the prosperity of the entire U.S. depends. This affects every single American, no matter how they voted, or how they think of their own identity or anyone else’s. That includes every single business and worker in the U.S.

The U.S. Deficit is at 6% - and Japan and China have been running deficits near 9% of GDP, while Canada and the EU have been trying to reduce theirs.

Those restraints in spending are leading directly to the weakness in other economies.

Almost everything the Trump administration seems to be proposing - is more likely to trigger individual and business defaults: extra costs being imposed by tariffs, and especially government cuts.

The idea that looser regulation or less enforcement right now will lead to better returns for tech, or for investors ignores the industrial scale rip-offs, fraud and predation that are already a defining feature of the current economy.

That is because there is a fundamental misdiagnosis of what is wrong with the global economy right now, and it is because too many people have borrowed too much money and paid too much for an asset, creating an “everything bubble” with a lot of overpriced assets and not enough money to pay for them - because too much money has already gone to the top, and the bottom, middle and more are starting to run out.

There’s a political proverb, usually made about socialism, “the problem is when you run they run out of other people’s money,” when that is the problem with the economy, right now.

It’s not hard to see who doesn’t have money right now - the vast majority of people everywhere whose net worth and income doesn’t end in '“-illions.”

That’s why much of what is being proposed is pouring more fuel on the fire - extending tax cuts for the people with the most money, deregulation, stronger monopolies, cuts to spending.

The delusion on the part of people who believe this to be the solution - like Elon Musk, or Peter Thiel - is that they ignore that this is exactly what governments have been doing since the 1970s.

More of the same will destabilize the economy even faster, because it will accelerate defaults among the middle and working class, which will affect individual families, their communities, their tax base, their businesses and all the companies who are still invested in mortgages and real estate, which includes a lot of pension funds.

The New Deal was about more than just public investment. It was also about reining in the predatory nature of monopolies. FDR did it, and Teddy Roosevelt had done it as well. That means effective and impartial regulation, law enforcement and the courts, investigating and prosecuting anti-trust.

That doesn’t seem to be the direction that the new administration is headed in, which is part of what is so baffling about Bannon’s statements.

Which is to say, if you recognize that there is another historical perspective that provides an explanation that is not just different, it is more accurate. And the reason for the argument that it is a better argument is that when look at what actually won the U.S. War effort, and built the tech industry, and made the U.S. a powerhouse of innovation and industry, is the opposite of pretty much everything that the team of folks he is associated with are proposing.

Decades of having bad economic history drummed into our heads, taught at leading universities, and repeated ad nauseam on the news has had its effect - even the system’s critics believe the propaganda, too. There’s a certain amount of romantic and heroic drama to all the people lining up to man the barricades, but it’s based in the idea that the system must collapse, or that there has to be conflict because change is perceived as impossible, because people would rather do that, than just change their mind.

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DFL