Why is tuition so high in state universities that the NYT is wondering if families will go on being able to afford it?

As someone who has observed this rise in tuition over an academic career of 30 years, as graduate student and professor, I have some theories from an insider perspective.

State universities have had to raise tuition because state legislatures have continually cut back every year the amount of state funding for them. Already in 2005 this article in Philanthropy News Digest explained:

'For example, less than 14 percent of the University of Oregon's total revenue came from state funds in 2003-04, compared to 32 percent in 1985-86, while tuition fees accounted for more than 33 percent of the university's budget, compared to 22 percent twenty years ago. Meanwhile, the University of Michigan has lost 12 percent of its state funding, or $43 million, over the past two years. According to UM spokeswoman Julie Peterson, state money now only accounts for 8 percent of the university's budget."We can't rely on state funding alone," said Peterson."It simply isn't enough."'

That statistic, whereby the University of Oregon went from having 33 percent of its total revenue from state sources in 1985 to 14 percent in 2005, was typical of what happened throughout the whole country. The typical revenue streams for state universities used to be 1) State support, 2) tuition and fees, 3) Federal grants, and 4) alumni donations and the resulting endowment. At some state universities, the state contribution may now be the fourth largest source.

Now, why did states cut back the universities so much? It wasn't that the state legislators were bad people or anti-intellectuals for the most part.

The Reagan/ Grover Norquist line that government is not the solution, government is the problem, and the demand for lower taxes (especially on the wealthy) was influential in many states. So essentially the American big business class of about 3 million people was given the opportunity to quadruple its vast wealth through lower taxes (when you lower taxes on a particular segment of the public, that is wealth distribution in their favor). Meanwhile public functions of government are cut back and everybody else gets potholes, closed public libraries, underfunded state universities, etc.

I can remember when I started grad school at UCLA in 1979 I heard on the radio that because of steep cutbacks in property taxes, the state would no longer be able to afford to spray for mosquitoes. I thought to myself, lord, they'll end up giving themselves malaria to avoid a millage!

A big drain on state budgets is the penitentiary system. In just the decade 1980 to 1990, the prison and jail population in the US doubled. Since 1980, the prison population has quadrupled. By the end of 2006, over 2 million persons were in prison and another 5 million were on probation or on parole.

I remember reading in the Ann Arbor News in 1988 about a big debate at the statehouse in Lansing over funding for prisons versus funding for universities. The prisons won.

In these same nearly four decades, there have been substantial declines in violent crimes and crimes against property in the US. The vastly increased prison population was produced by unreasonably long prison sentences for non-violent crime, by ridiculous 3-strikes-and-you-are-out life sentences and by the completely failed 'war on drugs' and by mandatory sentencing guidelines imposed by legislatures on judges in drug cases. Half of prisoners in state prisons did not commit a violent crime, and 20% are drug offenders.

This vast expansion in the number of imprisoned Americans required states to build prisons and to pay large amounts of money to keep people in them.

The states had to put their money into prosecuting, trying, imprisoning and then supporting to the tune of like $20,000 a year a bunch of . . . potheads.

So obviously the states had no money to spend on state universities, which were cut loose, and had to raise tuition and hit their alumni up for contributions just to try to keep their heads above water.

Of course, universities faced increased costs at the same time. European monopolies drove up the costs of medical journals in ways that the European Union should look into. Digitalization has been a huge added cost that cannot be escaped (in many cases it means paying twice for books and other materials, once in hard copy and once in digital form.) Universities with medical schools face the high costs of acquiring increasingly high tech, state of the art medical equipment. Etc.

But I think the 'war on drugs' and the cost of prisons has deeply harmed state economies and has hurt access to state universities for working and middle class families.

Marijuana in particular may well have important medicinal properties, and it should just be legalized.

This is a conclusion a lot of frustrated law enforcement officials have come to, and they are campaigning for an end to prohibition. Reuters has more.

It is true that some proportion of the population may face addiction problems from marijuana. But it is not as if it isn't already a multi-billion dollar business and widely available. About 15 percent of Americans regularly use it. And about 1/5 of the population is susceptible to alcohol addiction, but that doesn't impel us to a second Prohibition in its regard. Use some of the tax receipts on the industry to fund treatment of those who can't handle it. A lot of the deleterious effects of being high come from people driving under the influence. But actually you could just mandate that the auto industry put in ignition switches that only a sober person has the reflexes to make work. Since we are likely to own the auto industry soon, we should be able to do what we want. And besides, green mass transit is much better than individuals driving around wreaking mayhem,and a pothead on a subway isn't much of a threat to anyone. We should move in that direction for all sorts of reasons.

I can remember reading an op-ed in the NYT years ago arguing that there are 60 million crimes a year in the United States, but only a tiny fraction of the perpetrators is ever actually prosecuted and a smaller fraction still brought to trial. I thought to myself, and a good thing too! How would we pay for 60 million prisoners? And, if you have a country of 280 million people committing 60 million crimes a year, you clearly just have way too many laws.

The baneful impact on the United States of Puritanism, which comes in part from the Religious Right, has diverted our energies from educating ourselves, and developing our society, toward instead creating a Nanny State that employs people to make sure you only get high from alcohol, not from other substances. Bush even created an FBI porn squad. As if wealthy Republican hoteliers weren't the primary distributors of porn (via pay per view channels) in the country.

If the Religious Right could, it would just close down all the biology classes in the country (because after all they teach that wicked Darwin) and leave the development of biotech to the South Koreans, with Americans--denied the wealth that biotechnological innovation will bring in--turned into unemployed riffraff.

It turns out that if we had more personal freedoms, we'd have more state monies and could educate ourselves to develop our potential as free human beings.

In the past 40 years, the snowball has been going in the other direction-- fewer personal freedoms, a vast gulag of the incarcerated, and less and less state money for the development of the minds of the public. We've built ourselves a big ignorant prison, with a loud-mouthed fundamentalist preacher for a warden, and called it America.

We should legalize pot, and tax the resulting industry. We should repeal mandatory sentencing guidelines and develop rehabilitation strategies rather than putting the ill-behaved in expensive state hotels. And we should go back to having state-funded state universities.

Ships at anchor

One of the most disturbing aspects of this credit crunch is its shock to the truly broad economy of global trade. According to an October 29 Bloomberg report, 90 percent of the USD 13.6 trillion global trade in goods relies on letters of credit exchanged between financial institutions to ensure payment of shipped goods. As trust contracts even within the once-cozy confines of Wall Street and other financial districts, its compression globally and, in particular, its effect on letters of credit is even more pronounced. Letters of credit have financed global trade for centuries, and especially in recent years. But financial intermediaries are now either refusing to honor these letters of credit or are hiking their premiums by multiples of what they were just months ago. Over the long chain of intermediaries involved in global trade, trust in repayment is dissipating like electrical current sent too far. Added to the problem is that plunging commodity prices and rapidly shifting exchange rates threaten to render the shipments themselves unprofitable en route to their destination. Moreover, shipping firms have an enormous debt burden due to a frenzied boom in buying new ships over the past several years in anticipation of continuing robust expansion in global trade. In consequence, the Baltic Dry Index (a measure of rates for shipping dry goods) has plunged by over 90 percent from its May 21, 2008, peak. The container-shipping index is expected to show even more spectacular declines as this shock wave rips through far-flung production chains in our borderless world.

The World Bank, IMF and other agencies are painfully aware of this crisis in global trade, and are working to extend short-term funding to low-income countries. But since global trade is, as we noted, a USD 13 trillion annual business, these agencies simply do not have the means to deal with a problem of this scale. Imagine the scenario early next year if this crisis within a crisis continues: goods are not being shipped, and hence those who export are being hurt; but those who import are being hurt as well, as they do not receive the raw materials and goods to make things with and to consume. The entire global supply chain is at risk, something that the World Trade Organization recognizes but is ill-equipped to address. Already, the East Asian port cities of Singapore, Hong Kong and Taiwan are witness to vast fleets of bulk carriers and other vessels riding at anchor in wait of better times. The latest projection for global growth is 1.7 percent, well below the 3 percent level that marks a global recession; but considering the momentum of current economic events, growth seems set to slide even further.

The credit freeze drove global finance to the brink of collapse in October, and it could quickly be driven back there and beyond by some blindsiding turn of events. This includes spillovers from the ongoing compression of global trade, the havoc pouring out of the currency markets and the ongoing implosion of the USD 2 trillion hedge fund industry. Or the accelerating downturn in American commercial property markets could undermine asset-backed securities enough to engender a new round of panic stretching across asset classes. The last redoubts of the optimists are the vast, unregulated universes of finely distributed risk seen in the USD 55 trillion credit default swap market, a subset of the nearly USD 670 trillion derivatives market. These derivatives markets are said to be impervious to the chaos swirling around them because they are largely insurance contracts that, overall, generally cancel each other out. Maybe so, but until recently subprime was regarded as too small an asset class to have systemic implications. Everyone should be concerned about the fact that derivatives are not traded in open markets with proper regulation on product design and capital-adequacy margins. Indeed, more than a few credible, specialist voices warn that the collapse of one or more large "reference entities" (i.e., the firm or other item being insured by these contracts) could trigger a catastrophe. The ostensible dispersion of risk through derivatives may have, in fact, produced an enormous systemic risk, akin to the explosive potential of a huge concentration of combustible dust awaiting a spark.

Japanization?

The details of this financial crisis - its enormous scale, the lack of trust among financial institutions, the freezing of the commercial paper markets and other evidence of an accelerating credit crunch - naturally make one think of Japan in the 1990s. And much specialist and media commentary has in fact been devoted to probing the lessons that Japan's post-bubble policy choices might offer as the US confronts the present meltdown. The main lesson would appear to be to act fast, firmly, and intelligently. This is a negative lesson rather than a roadmap of what to do. Japan's "10 lost years" in the 1990s saw a protracted string of policy failures and slow recognition of the need to use public money, especially via direct capital injections into the banks (such as the state's purchase of preferred stock and subordinated bonds), in order to shore up the banks' capital bases. Japan's stock and property bubbles collapsed largely at the start of the 1990s, but it took years for the authorities to recognize that their problems were systemic and to craft suitably comprehensive policy responses.

One of the main hurdles to effective action in Japan was the confidence that asset values would hit bottom and then recover after a few years, eliminating the need for serious public-sector action. This mistake was to some extent mirrored in the United States (and elsewhere) over the past year. The financial sector and financial authorities simply refused to recognize that toxic assets were taking a protracted, perhaps permanent loss of their bubble-era value. Both effectively colluded in a “wait and see” game, counting on recovery, a game that left the financial system spectacularly vulnerable. While they did not waste as much time as in the Japanese case during the 1990s, the scale of the tsunami that have since ensued dwarf any of the crises that roiled Japan from the late 1990s to early 2000s.

There was also political resistance to action, largely because the authorities were unwilling to investigate and prosecute criminal behavior. Public sector funds, amounting to Yen 685 billion, were first used to rescue seven failed "jusen" housing loan firms in 1996. This bail-out caused a political backlash that further encouraged the authorities to sit on their hands or intervene only sporadically as long as possible. In 1998, Japanese financial authorities injected a further Yen 1.8 trillion into the system, but the Long-Term Bank of Japan and the Nippon Credit Bank went bust (they are now, respectively, the Shinsei Bank and the Aozora Bank). August 24 of the same year saw the Economic Strategy Council formally set up. In 1999, this council announced a three-year suspension of any inquiries into bank management responsibility along with a further Yen 7.5 trillion injection of public funds. But these controversial moves failed to resolve the crisis and a protracted and dangerous deflation ensued.

So perhaps another negative lesson for America from Japan is that injecting even massive public funds is not in itself sufficient. The proper assessment of toxic assets via a close scrutiny of their value is clearly required, as is proposed by the FDIC (and appears about to become law). But perhaps more important even than that, there must be serious inquiry into management wrongdoing. Systemic failures require systemic solutions, lest the symptoms continue to fester and manifest themselves in periodic and perhaps increasingly large crises. In other words, if one is going to use the state, then its pecuniary as well as punitary arms need to be used with a comprehensiveness and intelligence that not only deals with the technical aspects of the crisis but also the natural political resistance to bailing out rich and irresponsible people whose actions contributed to the crisis. The latter clearly have to be made to pay, in the fiscal and legal senses of the term, lest the path to recovery be constricted by political fallout.


But to date, the American bailout and related policies are spectacular for their lack of transparency, accountability and consistency. As a result of various missteps and volte-faces, Treasury Secretary Henry Paulson's credibility is perhaps as low as that of the current President. At a September 23 Senate Banking Committee hearing, Paulson declared that "we need oversight...we need transparency," but he appears to have shifted his position considerably. As of late November, Paulson's Treasury had already spent about USD 300 billion worth of the TARP program. About USD 125 billion of this went to America's nine largest banks and investment banks, another USD 125 billion has gone to publicly traded regional banks (many almost certain to fail even with this support), and the remainder has been largely allocated to American International Group. According to some recent assessments, much of this money has been used by the banks to pay shareholders, with plenty also going to executive salaries and bonuses. Another chunk of it has gone for buybacks to increase the value of shares. These are all serious, and in some cases potentially illegal, departures from the original purposes of the fund.

Keep in mind that Paulson originally argued that, as the name implies, the “Troubled Assets Relief Program” would be used to purchase mortgage-backed securities. These assets were then be sold through something resembling a reverse auction (buying them from the banks at the lowest prices they would be willing to sell them for). That plan was absurdly unworkable then, and remains so, but in a November 12 about-face Paulson abandoned the original plan and declared the Treasury would focus on capital injections and other measures to end the freeze in consumer credit markets. This abrupt shift shocked Wall Street and came with few concrete details of how the new approach would be implemented.

Paulson has in fact been the most salient example of mismanagement. Last July, he secured authority from Congress to aid Fannie Mae and Freddie Mac by promising that he would not need to use it. Then in early September he did have to use it. His above-noted shift on capital injections was more recently followed by a declaration that he would probably need to use the entire USD 700 billion of the TARP. This declaration came a week after he claimed he would need only about half the funds, and would leave the remainder to the Obama Administration. Paulson's serial reversals of earlier positions are certainly rooted in the incredible flux of events. But his job is to craft pro-active policy and seek to stabilize markets rather than further roil the latter.

Moreover, Paulson’s mismanagement of the bail-out and the TARP is hard to explain as merely poor foresight. It was clear last year, and certainly from September of this year, that injecting capital directly into the banks was absolutely essential. Paulson staunchly opposed this policy, for reasons that remain obscure. But there is speculation that Paulson, as a product of Wall Street (a former head of Goldman Sachs), simply was unable to admit that matters had come to such a crisis that capital injections were necessary. In other words, ideological and personal ties to Wall Street appear to have prevented Paulson from recognizing the obvious (in back of that, one has to wonder how much lobbying there was on him from Wall Street not to opt for the interventionist strategy). Whatever the case, the policy failures with this program and his allowing funds to be used to pay dividends, bonuses and deferred compensation, as well as in making acquisitions, threaten to discredit the overall effort to fix the financial sector's crisis through direct public intention of capital into the banks. This interventionism is essential, but it is worrisome that Paulson may have succeeded in politicizing it to the point where a proper clean-up is either difficult to do or is done and then generates a strong backlash. This complacent incompetence, too, is reminiscent of post-bubble Japan’s policy failures.

We all learned from the Japanese experience that it is imperative to act fast, but it is also just as critical to act intelligently and in the collective interest. Wasting precious time allows the crisis to deepen and thus increases the eventual costs of bail-outs and economic losses. Politicized policy likewise risks generating a dangerous level of distrust concerning efforts to recapitalize the banks, providing a strong foothold for reactionary politics in the deepening recession. But thankfully, Paulson is running out of money, as once he hits the USD 350 billion mark, he must go to the US Congress to receive the next USD 350 billion. One can only hope that Paulson's failures force the Congress to investigate, and very aggressively investigate, wrongdoing in tandem with focusing on the smart targeting of public funds. One thing that is clear from Japan is that allowing the financial industry and its ideologically blinkered representatives to craft what they like is a recipe for costly failure, a failure whose burden compounds over the years in lost opportunities for millions in the real economy.

After all, she won’t be the first female Secretary of State (in fact, she will make it 3 out of the last 4 who have been women), and the office has not been, at least not recently, considered a suitable consolation prize for those who don’t quite make it to be president.

However, we have to wonder whether she hopes to take the office of Secretary of State back to the future, transforming it into a role in the U.S. system that it once occupied, and perhaps should again.

Over the last fifty years, the office of Secretary of State has been held by three types of public figures

1) Foreign Policy “Experts” chosen from academia, the diplomatic corps, or the military because they are thought to have a special intellectual insight into the dynamics of foreign affairs (e.g. Condoleeza Rice, Colin Powell, Lawrence Eagleburger, Henry Kissinger, John Foster Dulles);

2) Senior Statesmen who are capping long careers by giving their services to the highest diplomatic office (e.g. Warren Christopher, Edmund Muskie, Dean Rusk);

3) Symbolic Figures who are given the office because the President plans to be his own chief diplomat and needs someone who can deliver his statements effectively on his behalf (e.g. Madeleine Albright, Christian Herter).

Hillary Clinton fits into none of these categories, unless we assume that she is looking upon this post as her capstone gift to the nation. I tend to doubt that she sees it that way.

More likely, she is looking back to a much earlier vision of the Secretary of State as the proving ground for past and future presidential aspirants.

Between 1801 and the Civil War, six of the eleven men elected to the presidency had previous served as Secretary of State (Jefferson, Madison, Monroe, John Quincy Adams, Martin Van Buren, and James Buchanan). At least five other future or former Secretaries of State had made major runs at the office (Henry Clay in 1824, 1832, and 1844; Lewis Cass in 1848; William Seward in 1856 and 1860; and John C. Calhoun and Daniel Webster who were perennial presidential contenders although neither secured a major party nomination).

The most interesting, and I think most plausible, reason why Hillary Clinton wants to be Secretary of State now is that she plans to secure the next open contest for the Democratic presidential nomination. In this regard, her decision to approach that goal in this way may help us reconsider where to look for presidential nominees. There are a number of very sound reasons why we might want to return to an idea that the Secretary of State is a fit training ground for presidential aspirants. The wide open race in 2008, with its nearly uncountable number of debates, demonstrated again and again why the most common modern incubators fail to provide the right types of experiences for the presidential office.

Senators. 2008 aspirants who performed their major public work as U.S. Senators included six Democrats (Clinton, Obama, Biden, Christopher Dodd, John Edwards, and Mike Gravel) and three Republicans (McCain, Fred Thompson, and Sam Brownback) made up nearly half of the total field. But we are repeatedly told that Senators lack training as executives with little need to manage personnel or administrative tasks, and some Senators (depending on committee assignments) may lack extensive familiarity with foreign policy.

Governors. Five 2008 aspirants performed their major public work as governors (Republicans Mitt Romney, Mike Huckabee, Tommy Thompson, and Jim Gilmore; and only one Democrat, Bill Richardson), and governors have tended to make up the major part of most presidential fields since the twentieth century. Four of the last seven presidential winners (Jimmy Carter, Ronald Reagan, Bill Clinton, and George W. Bush) trained as governors. Furthermore, we should not forget that John McCain chose a governor as his vice presidential nominee, and apart from his doomed hope to get Republicans to accept Joe Lieberman, he appears to have seriously considered only present and former governors for the post (Tom Ridge, Bobby Jindal, Charlie Crist, and Tim Pawlenty). Governors like to point out that they have executive and administrative experience, but by the very nature of holding state offices, they lack foreign policy experience (whether they can see foreign countries from their states or not).

Secretary of State, however, is a post that involves both significant executive and administrative experience and major responsibilities for crafting and executing the nation’s foreign policy. It is a perfect training ground for future presidents and perhaps should once again serve as our presidential incubator; in this regard, Senator Clinton’s appointment, whether or not she currently thinks of herself as looking toward 2016 or not, may serve to put the focus back on a particularly appropriate vision of the office of Secretary of State.

However, we need to recognize that this vision also introduces tensions into the office that do not exist when it is occupied by a Madeleine Albright. Presidential aspirants have their own visions and their own agendas that makes them less likely to work with the current president without significant internal tensions.

When Woodrow Wilson sought to install William Jennings Bryan, his primary rival within the Democratic party, at the State Department, things did not go well, and Bryan soon resigned over a policy dispute with Wilson, significantly raising doubts about the president’s foreign policy within his own party. As many commentators have noted, choosing a “team of rivals” is fraught with risk for the president who may be challenged from within, but if this works, for both Obama and Clinton, it may well suggest a new vision of our oldest cabinet office and the training of future presidents.

On a December day in 1932, with the country prostrate under the weight of the Great Depression, ex-president Calvin Coolidge -- who had presided over the reckless stock market boom of the Jazz Age Twenties (and famously declaimed that"the business of America is business") -- confided to a friend:"We are in a new era to which I do not belong." He punctuated those words, a few weeks later, by dying.

A similar premonition grips the popular imagination today. A new era beckons. No person has been more responsible for arousing that expectation than President-elect Barack Obama. From beginning to end, his presidential campaign was born aloft by invocations of the"fierce urgency of now," by" change we can believe in," by"yes, we can!" and by the obvious significance of his race and generation. Not surprisingly then, as the gravity of the national economic calamity has become terrifyingly clearer, yearnings for salvation have attached themselves ever more firmly to the incoming administration.

This is as it should be -- and as it once was. When in March 1933, a few months after Coolidge gave up the ghost, Franklin Delano Roosevelt was inaugurated president, people looked forward to audacious changes, even if they had little or no idea just what, in concrete terms, that might mean. If Coolidge, an iconic representative of the old order, knew that the ancien régime was dead, millions of ordinary Americans had drawn the same conclusion years earlier. Full of fear, depressed and disillusioned, they nonetheless had an appetite for the untried. Like Obama, FDR had, during his campaign, encouraged feverish hopes with no less vaporous references to a"new deal" for Americans.

Brain Trust vs Brainiacs

Yet today, something is amiss. Even if everyone is now using the Great Depression and the New Deal as benchmarks for what we're living through, Act I of the new script has already veered away from the original.

A suffocating political and intellectual provincialism has captured the new administration in embryo. Instead of embracing a sense of adventurousness, a readiness to break with the past so enthusiastically promoted during the campaign, Obama seems overcome with inhibitions and fears.

Practically without exception he has chosen to staff his government at its highest levels with refugees from the Clinton years. This is emphatically true in the realms of foreign and economic policy. It would, in fact, be hard to find an original idea among the new appointees being called to power in those realms -- some way of looking at the American empire abroad or the structure of power and wealth at home that departs radically from views in circulation a decade or more ago. A team photo of Obama's key cabinet and other appointments at Treasury, Health and Human Services, Commerce, the President's Economic Recovery Advisory Board, the State Department, the Pentagon, the National Security Council, and in the U.S. Intelligence Community, not to speak of senior advisory posts around the President himself, could practically have been teleported from perhaps the year 1995.

Recycled Clintonism is recycled neo-liberalism. This is change only the brainiacs from Hyde Park and Harvard Square could believe in. Only the experts could get hot under the collar about the slight differences between"behavioral economics" (the latest academic fad that fascinates some high level Obama-ites) and straight-up neo-liberal deference to the market. And here's the sobering thing: despite the grotesque extremism of the Bush years, neo-liberalism also served as its ideological magnetic north.

Is this parochialism, this timorousness and lack of imagination, inevitable in a period like our own, when the unknown looms menacingly and one natural reaction is certainly to draw back, to find refuge in the familiar? Here, the New Deal years can be instructive.

Roosevelt was no radical; indeed, he shared many of the conservative convictions of his class and times. He believed deeply in both balanced budgets and the demoralizing effects of relief on the poor. He tried mightily to rally the business community to his side. For him, the labor movement was terra incognita and -- though it may be hard to believe today -- played no role in his initial policy and political calculations. Nonetheless, right from the beginning, Roosevelt cobbled together a cabinet and circle of advisers strikingly heterogeneous in its views, one that, by comparison, makes Obama's inner sanctum, as it is developing today, look like a sectarian cult.

Heterogeneous does not mean radical. Some of FDR's early appointments -- as at the Treasury Department -- were die-hard conservatives. Jesse Jones, who ran the Reconstruction Finance Corporation, a Hoover administration creation, retained by FDR, that had been designed to rescue tottering banks, railroads, and other enterprises too big to fail, was a practitioner of business-friendly bailout capitalism before present Treasury Secretary Henry Paulson was even born.

But there was also Henry Wallace as Secretary of Agriculture, a Midwestern progressive who would become the standard bearer for the most left-leaning segments of the New Deal coalition. He was joined at the Agriculture Department -- far more important then than now -- by men like Mordecai Ezekiel, who was prepared to challenge the power of the country's landed oligarchs.

Then there were corporatists like Raymond Moley, Donald Richberg, and General Hugh Johnson. Moley was an original member of FDR's legendary"brain trust" (a small group of the President's most influential advisers who often held no official government position). Richberg and Johnson helped design and run the National Recovery Administration (the New Deal's first and failed attempt at industrial recovery). All three men were partial to the interests of the country's peak corporations. All three wanted them released from the strictures of the Sherman Anti-Trust Act so that they could collaborate in setting prices and wages to arrest the killing deflation that gripped the economy. But they also wanted these corporate behemoths and the codes of competition they promulgated subjected to government oversight and restraints.

Meanwhile, Felix Frankfurter (another confidant of FDR's and a future Supreme Court justice), aided by the behind-the-scenes efforts of Supreme Court Justice Louis Brandeis, fiercely contested the influence of the corporatists within the new administration, favoring anti-trust and then-new Keynesian approaches to economic recovery. Secretary of Labor Frances Perkins used her extensive ties to the social work community and the labor movement to keep an otherwise tone-deaf president apprised of portentous rumblings from that quarter. In this fashion, she eased the way for the passage of the Wagner Act that legislated the right to organize and bargain collectively, and that ended the reign of industrial autocracy in the workplace.

Roosevelt's"brain trust" also included Rexford Tugwell. He was an avid proponent of government economic planning. Another founding member of the"brain trust" was Adolph Berle, who had published a bestselling, scathing indictment of the financial and social irresponsibility of the corporate elite just before FDR assumed office.

People like Tugwell and others, including future Federal Reserve Board chairman Marriner Eccles, were believers in Keynesian deficit spending as the road to recovery and argued fiercely for this position within the inner councils of the administration, even while Roosevelt himself remained, until later in his presidency, an orthodox budget balancer.

All of these people -- the corporatists and the Keynesians, the planners and the anti-trusters -- were there at the creation. They often came to blows. A genuine administration of"rivals" didn't faze FDR. He was deft at borrowing all of, or pieces of, their ideas, then jettisoning some when they didn't work, and playing one faction against another in a remarkable display of political agility. Roosevelt's tolerance of real differences stands in stark contrast to the new administration's cloning of the Clinton-era brainiacs.

It was this openness to a variety of often untested solutions -- including at that point Keynesianism -- that helped give the New Deal the flexibility to adjust to shifts in the country's political chemistry in the worst of times. If the New Deal came to represent a watershed in American history, it was in part due to the capaciousness of its imagination, its experimental elasticity, and its willingness to venture beyond the orthodox. Many failures were born of this, but so, too, many enduring triumphs.

Beyond the Bailout State

Why, at least so far, is the Obama approach so different? Some of it no doubt has to do with the same native caution that caused FDR to navigate carefully in treacherous waters. But some of it may result from the fallout of history. Because the Great Depression and the New Deal happened, nothing can ever really be the same again.

We are accustomed to thinking of the Bush years -- maybe even the whole era from the presidency of Ronald Reagan on -- as a throwback to the 1920s or even the laissez-faire golden years of the Gilded Age of the late nineteenth century. In some respects, that's probably accurate, but in at least one critical way it's not. Back in those days, faced with a potentially terminal financial crisis, the government did nothing, simply letting the economy plunge into depression. This happened repeatedly until 1929, when it happened again.

Since the New Deal, however, inaction has ceased to be a viable option for Washington. State intervention to prevent catastrophe has become an unspoken axiom of political life in perilous times. Of course, thanks to regulatory mechanisms installed during the New Deal years, there was no need to engage in heroic rescues -- not, at least, until the triumph of deregulation in our own time.

Then crises began to erupt with ever greater frequency -- the stock market crash of 1987, the savings and loan collapse at the end of that decade, the massive Latin American debt defaults of the early 1990s, the collapse of the economies of the Asian"tigers" in the mid-1990s, the near bankruptcy of the then-huge hedge fund, Long Term Capital Management, later in that decade, the dot-com implosion at the turn the century, climaxing with the general global collapse of the present moment. Beginning perhaps with the bailout of the Chrysler Corporation in the late 1970s, these recurring crises have been met with increasingly strenuous efforts to stop the bleeding by what some have called"the bailout state."

The Resolution Trust Corporation, created to rescue the savings and loan industry, first institutionalized what Kevin Phillips has since described as a new political economy of"financial mercantilism." Under this new order the state stands ready to backstop the private sector -- or at least the financial sub-sector which, for the past quarter century, has been the driving engine of economic growth -- whenever it undergoes severe stress.

Today, the starting point for all mainstream policymakers, even those who otherwise preach the virtues of the free market and the evils of big government, is the active intervention of the state to prevent the failure of private-sector institutions considered"too big to fail" (as with most recently Citigroup and the insurance company AIG). So, too, the tolerance level for deficit spending, not only for military purposes but, in extremis, to help stop ordinary people from going under, is infinitely higher than in 1932. Ronald Reagan was prepared to live with such spending, if necessary, even as he removed portraits of Thomas Jefferson and Harry S. Truman from the Cabinet Room and replaced them with a canvas of Calvin Coolidge.

The question for our"new era" -- not one our New Deal ancestors would have thought to ask -- has become: How do we get beyond the bailout state? This is one crucial realm where genuinely new thinking and new ideas are badly needed.

At the moment, as best we can make out, the bailout state is being managed in secret and apparently in the interests, above all, of those who run the financial institutions being"rescued." Often, we don't actually know who is getting what from the Federal Reserve and the Treasury, or on what terms, or even which institutions are being helped and which aren't, or often what our public monies are actually being used for.

What we do know, however, is anything but encouraging. It includes tax exemptions for merging banks, prices for public-equity stakes in failing outfits that far exceed what is being paid by governments (or even private investors) abroad for similar holdings. Add to this a stark lack of accountability, aggravated by the fact that the U.S. government has neither voting rights (nor even a voice) on boards of directors whose firms would be in bankruptcy court without Washington's aid.

Living in an Empire of Depression

Are we, then, witnessing the birth of some warped, exceedingly partial version of state capitalism -- partial, that is, to the resuscitation of the old order? If so, lurking within this string of bum deals might there not be a great opportunity? Putting the economy and country back together will require massive resources directed toward common purposes. There is no more suitable means of mobilizing and steering those resources than the institutions of democratic government.

Under the present dispensation, the bailout state makes the government the handmaiden of the financial sector. Under a new one, the tables might be turned. But who will speak for that option within the limited councils of the Obama team?

A real democratic nationalization of the banks -- good value for our money rather than good money to add to their value -- should be part of the policy agenda up for discussion in the Obama era. As things now stand, the public supplies the loans and the investment capital, but the key decisions about how they are to be deployed remain in private hands. A democratic version of nationalizing the financial system would transfer these critical decisions to new institutions created by the Congress and designed to pursue public, not private, objectives. How to subject the flow of credit and investment capital to public control ought to be on the drawing boards if we are to look beyond the old New Deal to a new one.

Or, for instance, if we are to bail out the auto industry, which we should -- millions of jobs, businesses, communities, and what's left of once powerful and proud unions are at stake -- then why not talk about its nationalization, too? Why not create a representative body of workers, consumers, environmentalists, suppliers, and other interested parties to supervise the industry's reorganization and retooling to produce, just as the president-elect says he wants, new green means of transportation -- and not just cars?

Why not apply the same model to the rehabilitation of the nation's infrastructure; indeed, why not to the reindustrialization of the country as a whole? If, as so many commentators are now claiming, what lies ahead is the kind of massive, crippling deflation characteristic of such crises, then why not consider creating democratic mechanisms to impose an incomes policy on wages and prices that works against that deflation?

Overseas, if everything isn't up for discussion -- and it most certainly isn't -- it ought to be. What happens there bears directly on our future here at home. After all, we live in the empire of depression. America's favorite export for more than a decade has been a toxic line-up of securitized debt. Having ingested it in lethal amounts, every economy in the world from Iceland's and Germany's to Russia's and Indonesia's is either folding up or threatening to fold up like an accordion under the pressure of economic disaster.

Until now, the American way of life, including its economy of mass consumption, has depended on maintaining the country's global preeminence by any means possible: economic, political, and, in the end, military. The news of the Bush years was that, in this mix, Washington reached for its six-guns so much more quickly.

A global depression will challenge that fundamental hierarchy in every conceivable way. The United States can try to recapture its imperiled hegemony by methods familiar to the Obama-Clinton-Bush (the father) foreign policy establishment, that is by using the country's waning but still intimidating economic and military muscle. But that's a devil's game played at exorbitant cost which will further imperil the domestic economy.

It might, of course, be possible, as in domestic affairs, to try something new, something that embraces the public redevelopment of America in concert with the global South. This would entail at a minimum a radical break with the"Washington Consensus" of the Clinton years in which the United States insisted that the rest of the world conform to its free market model of economic behavior. It would establish multilateral mechanisms for regulating the flow of investment capital and severe penalties and restrictions on speculation in international markets. Most of all, it would mean lifting the strangulating grip of American military might that now girdles the globe.

All of this would require a capacity for re-imagining foreign affairs as something other than a zero-sum game. So far, nothing in Obama's line-up of foreign policy and national security mandarins suggests this kind of potential policy deviance. Again, no Rooseveltian"brain trust" is in sight, even though unorthodoxies are called for, not just because of the hopes Obama's victory have aroused, but because of the urgency of our present circumstances.

If original thinking doesn't find a home somewhere within this forming administration soon, it will be an omen of an even more troubled future to come, when options not even being considered today may be unavailable tomorrow. Certainly, Americans ought to expect something better than a trip down (the grimmest of) memory lanes into the failed neo-liberalism of yesteryear.

Leaks to the Indian press by security officials in charge of interrogating the captured terrorist, Ajmal Amir Kamal (or Qasab?) are fleshing out the background of the attack on Mumbai and clarifying the evidence that it was an operation of the Lashkar-e Tayiba [the"Army of the Good"].

The Indian counterpart of the CIA, the Research and Analysis Wing (RAW), intercepted a cell phone call on November 18 to a number in Lahore, Pakistan, known to be that of a Lashkar-i Tayiba handler, saying that the caller was heading to Mumbai. They later found the phone itself on a hijacked Indian fishing boat, which the attackers had taken over to camouflage their approach to the port.

The sole captured LeT operative, Kamal, is said by the Indian press to be from Faridkot village near Dipalpur Tahsil in Okara District of Pakistani Punjab, southwest of Lahore [I saw one article, which I can no longer retrieve, in which the Indian press mispelled the tahsil or county as Gipalpur]). This is such a remote and little-known place that even Pakistani newspapers were having difficulty tracking it down).

Kamal is said to be telling Indian security that he and the others trained in camps in Pakistani Kashmir. (The original princely state of Kashmir, largely Muslim, is divided, with one third in Pakistani hands and two-thirds in Indian; India joined its portion to largely Hindu Jammu to create the province of Jammu and Kashmir.)

The Kashmir police have gotten good enough at counter-terrorism measures that elements of the LeT may have decided to go after a soft target such as Mumbai instead.

The story begins with the 1977 coup of Gen. Zia ul-Haqq, a Muslim fundamentalist who hanged his boss, PM Zulfikar Ali Bhutto, after overthrowing him. Zia favored Sunni fundamentalists and introduced discriminatory policies against Pakistani Shiites, secularists, etc.

Then in 1979 the Soviet Red Army came into Afghanistan to prop up a shaky Communist junta. Gen. Zia was suddenly America's man at the front lines of fighting the Soviets, and his Inter-Services Intelligence helped organize Afghan refugees in Pakistan to fight the Soviets. The ISI favored the most radical fundamentalists among the Mujahideen, such as Gulbadin Hikmatyar, who led the Hizb-i Islami. This model, of using private armies funded by black money (generated by illegal arms or drug sales) to"roll back" leftists, was being applied by Reagan in Nicaragua at the same time.

The military dictatorship was taking a lion's share of the Pakistani budget, and to whip up popular passions and make itself popular, it promoted the liberation of the rest of Muslim Kashmir from Hindu India as another major project alongside getting the Soviets out of Afghanistan. (This is the language of the military; actually India is a secular multicultural state, not a formally Hindu one; and in opinion polls Kashmiris do not say they want to join Pakistan, though they would like independence).

A lot of Pakistanis probably did not care so much about Kashmir, having other problems in life (and already worried about having to adopt 3 million Afghan refugees). But the military in Pakistan constantly played on the public's emotions on the issue, as a way of justifying military perquisites. (When British India was partitioned into Muslim Pakistan and Hindu India in 1947, Kashmir was the only Muslim-majority province to be successfully grabbed by India; Pakistan insisted it should have gone to the Muslim state; the UN insisted on a referendum, which was never held.)

The model that the Reagan administration pressed on the Pakistani military, of funding rightwing"Islamic" militias to kill Soviets, gradually became standard operating procedure. But then the Pakistani Religious Right began adopting the model for themselves. If it is all right to mobilize death squads in one righteous cause, why not in others?

Emboldened, lower middle class Sunni hate groups grew up in rural areas such as Jhang Siyal, where Shiite Sufi leaders had been given big estates by premodern rulers and so were big landlords. The Sipah-e Sahaba Pakistan (SSP), formed in 1985, was one such organization. It turned to violence, killing Shiites. Revivalist Deobandi clergy were important in its leadership. I don't think Zia much cared if they killed Shiites.

Others, including elements in the Pakistani military began wondering why they should not apply the Reagan Jihad model to Kashmir. And they did. In the late 1980s, Hafiz Muhammad Said (once a professor of engineering at Punjab University) set up the Center for Mission and Guidance (Markaz al-Da'wa wa al-Irshad) in a huge compound at Muridke outside Lahore. The Center soon established the Lashkar-e Tayiba as its paramilitary. With the behind the scenes encouragement of elements in the Pakistani military, the LeT sent guerrillas into Indian Kashmir to attack Indian troops and facilities. The Lashkar prided itself on not killing civilians, on not targeting Shiites, and on keeping its focus on what they thought of as the Indian occupation forces. But they fought alongside Sipah-e Sahaba elements that also took off time from murdering Shiites to infiltrate into Indian Kashmir and stage attacks.

I saw this militarization of Pakistani civil society with my own eyes. I first went to the country in 1981 before you could just buy a Kalashnikov in the bazaar. When I was doing research there in 1988 and then again in 1990, the situation was completely different. Pakistan had never had a drug problem but now there were a million addicts (the US encouraged the Afghan mujahidin to grow poppies for heroin to finance the anti-Soviet struggle, and the drugs spilled into Pakistan). Weapons were freely available. Karachi was having a kind of civil war. I remember that fanatics from the religious right attacked an art exhibition in Lahore, a city of the arts (graven images not allowed & etc.) Political figures were accused of cynically creating Islamic movements for personal and political gain. This deterioration of Pakistan was, in some important part, a direct result of Reagan-Bush policies. They used Pakistan, corrupted it with all those drugs, arms, and radical Muslim militias that they called 'freedom fighters,' and then threw it away when they did not need it any more. Reagan and the Saudis funneled billions to the Pakistani military. What did ordinary Pakistanis have to show for it?

When the Soviets withdrew in 1988-1989 from Afghanistan and the Mujahideen took over, the Pakistani military lost control of its northern neighbor. It therefore funded and promoted the Taliban (expatriate Afghan young men who had been through Deobandi seminaries in northern Pakistan) from 1994, enabling them to take over Afghanistan. The Taliban ran terrorist training camps, at which the Sipah-e Sahaba and the Lashkar-e Tayiba trained for missions in Kashmir. Afghanistan in essence was the boot camp for Pakistani Reaganism.

The SSP and the Lashkar-e Tayiba was joined by other Sunni militias, including the Movement of the Holy Warriors (Harakat ul Mujahidin). In 2000, Mawlana Massoud Azhar broke off from the latter to form the Jaish-e Muhammad or Army of Muhammad, a particularly violent group focusing on Kashmir. All these Pakistani organizations trained their fighters in the Taliban camps, some of which were actually run by al-Qaeda once Bin Laden allied with the latter in 1996. (It is said that the Inter-Services Intelligence made the introduction).

High Dudgeon of Americans directed at the Pakistani military for this activity is the height of hypocrisy. The Reagan administration actively encouraged Islamabad to mount precisely such activities against the leftist government of Afghanistan (which, while dictatorial and brutally oppressive, was busily educating girls, admitting women to professions, spreading literacy, working against the vestiges of landlord feudalism, etc.) From a Pakistani point of view, Soviet-occupied Afghanistan and Indian-occupied Kashmir were morally equivalent.

In 2002, under pressure from Washington, military dictator Pervez Musharraf dissolved the Lashkar-e Tayiba and other similar groups and initially arrested many members. They were later released by the Pakistani courts on the grounds that they hadn't broken any Pakistani laws. The dissolution was a bit of a farce, since the groups just took other names. Someone who now has a prominent official position in the Pakistani government once wryly observed to me that the Musharraf government couldn't seem to find the Lashkar-e Tayib headquarters at Muridke just outside Lahore, even though it was huge and a well known landmark at which thousands gathered. And, Lashkar went on raising money, supposedly for civilian relief works in Kashmir.

The Pakistani military is itself now suffering blowback for its past policies. Its name is mud in Pakistan. A Pakistani Taliban has emerged that often declines to be its puppet, and which has killed hundreds of Pakistani troops. The Marriott in Islamabad was blown up by the Pakistani Taliban.

The cell that hit Mumbai was probably a rogue splinter group. They completely disregarded the old Lashkar-e Tayiba concentration on hitting only Indian troops in Kashmir, targeting civilians instead. It is very unlikely that anyone in the Pakistani military put them up specifically to this Mumbai operation. This attack was much more likely to be blowback, when a covert operation produces unexpected consequences or agents that were previously reliable go rogue.

The Mumbai attacks were not the first of this scale on an Indian target by the LeT.

If the Pakistani government does not give up this covert terrorist campaign in Kashmir and does not stop coddling the radical vigilantes who go off to fight there, South Asian terrorism will grow as a problem and very possibly provoke the world's first nuclear war (possible death toll: 20 million).

The civilian government that has recently taken over Pakistan is weak. If it puts too much pressure on the military too quickly, it risks another coup and destabilization. But the training camps in Azad Kashmir must be closed.

India, Pakistan, and the Obama administration need to do some serious diplomacy on Kashmir, and try to settle this major global fault line before the 10.0 earthquake finally hits.