Looking back at Year 2009, I think the biggest question that Americans grappled with was what kind of economic system would be best. Whatever system prevailed through 2008 (see below for my characterization) was obviously flawed. Just as in the Great Depression, this opened the door to considerations of alternatives.
What’s on the table right now?
Option 1: Planned Economy or “Trying to cheat our way out of recession”. If the housing market is soft, the government will guarantee all of the mortgages that are being issued to people who buy houses. If the housing market is still soft, the government will lower interest rates on those mortgages. If the housing market still won’t obey, the government will give outright tax credits to people who buy houses. If companies don’t think that they can afford to hire additional Americans given current wages, regulations, and taxes, we will first have the President cajole them into doing so. If that doesn’t work, we’ll have tax credits for companies that hire Americans. If people don’t want to buy GM and Chrysler cars, we’ll give them a $4,000 credit toward the purchase. When that isn’t sufficient, we’ll have the taxpayers buy GM and Chrysler. Obama and Congress will successively turn their attention to each sagging square of the American economic quilt and sew in $100 bills as reinforcements. When the market gives you an answer that you don’t like (e.g., that a house on the outskirts of Las Vegas isn’t worth much), declare that the market has failed and send in the government.
Option 2: 1970s-style regulation. Prior to the Ford Administration, the U.S. economy was heavily regulated, mostly for the benefit of incumbent companies. You’d need Department of Transportation approval to offer trucking or airline services, for example, and you’d have to do it at prices set by government regulators. Folks believe that they’ve seen the destructive effects of a free market and therefore that the government needs to step in with a heavier foot, starting with Wall Street.
Option 3: Faith in a charismatic leader. “Obama is so smart, I have faith in anything that he does,” is how one of my Cambridge neighbors described her feelings recently.
Option 4: Parliamentarianism. Give one party control of both legislature and executive and let them make major changes. This is how things work in most other Western countries, but the American system has been to keep power fragmented. Oftentimes we vote different parties into executive and legislative branches. Even when one party controls both Congress and the White House, parochial concerns have typically kept anything significant from being changed. We have elected a Representative or Senator not to push forward a grand Party agenda, but rather to bring a pork barrel project home to our town. The big push to pass a 2000-page $1 trillion health care bill that nobody had read or understood was an example of parliamentarianism at work and it was a shocking and surprising process to many.
As in the Great Depression, one thing that very few Americans seem to have faith in is market economics. The system that prevailed prior to 2009 was supposedly “free market capitalism” and we now know that it doesn’t work. Limiting ourselves to just those things that directly relate to the Crash of 2008-?, let’s consider what we actually had:
- laws and regulations preventing shareholders from nominating board members for public companies (enabling the CEO and other managers to pack the board with golfing buddies and then work together to loot from the shareholders); recall that nearly all of the Wall Street firms that blew up were public companies rather than the traditional partnerships
- laws and regulations giving an oligopoly to a handful of ratings agencies such as Moody’s (the guys who were paid by bond issuers to rate their sub-prime mortgage collections as AAA)
- policies encouraging banks to issue mortgages to people who were poor credit risks (Fannie Mae relaxed its own credit standards in 1999, on the Clinton Adminstration’s theory that it would help minorities and the poor; banks collected big fees for issuing mortgages to people who would never make payments and then stuck Fannie Mae with all of the risk (and then Fannie Mae blew up and the taxpayers were stuck with the losses (after Fannie Mae executives had taken billions of dollars home in salary))
People close to or favored by the government were able to make enormous amounts of money without taking any personal risk. That’s not a classical free market (in which investors can expect no more than a normal return on investment, after adjusting for risk). That is crony capitalism.
Where can we see a free market operating in order to evaluate whether it was a workable economic system? Due to the enormous size and power of governments worldwide, it seems almost impossible to find a truly free economy. In almost any country one could make a better return on investment by cozying up to a government official or collecting subsidies than by taking risks. The free market, however, does operate internationally. If you are sailing around in a freighter and want to buy sugar, you’ll buy it wherever it is cheapest without any incentives from or intervention by the U.N. If you’re sailing around in a freighter full of cash and want to invest it, there is no international tax system encouraging you to put the money in a particular place or industry. Does the free market work? Commodities by and large seem to be pretty cheap and efficiently produced. Capital flows to support rapid growth in China, Brazil, India, and other countries whose mix of education, costs, stability, and regulation are attractive. Why wouldn’t this free market system work domestically for the U.S.?
Perhaps when government grows beyond a certain percentage of the economy it is no longer possible to have a market economy. Federal spending in the U.S. right now is more than $3 trillion annually. A handful of senators on a single committee can direct a healthy slice of that $3 trillion wherever they choose. It shouldn’t therefore be a surprise that economists found political lobbying to yield the highest return on investment of anything that American companies did. (Lobbying need not result in direct government payments to be profitable; consider the Detroit automakers getting one line inserted into federal regulations, a 25 percent tariff on light trucks starting back in 1963.)
When federal, state, and local government constitute 40 percent of GDP, and the political system is open to lobbying, perhaps pretending that we can have anything resembling a free market is a mistake. Those of us who took Econ 101 are prejudiced against planned economies, but perhaps a Soviet-style planned economy is more efficient than a crony capitalist system.
In my opinion, this is the big question that we’re going to be working out as a society during the coming decade.