Wednesday, October 26, 2011

An Analogy

Whenever I see conservatives expressing alarm over budget deficits and falling currencies and insisting that our first priority should be to balance the budget and maintain currency value, I keep thinking of an analogy.

Imagine (and I know it seems far-fetched, but imagine) a society that has our technology in microscopes and bloodwork but for some reason never developed the germ theory of disease. People in this society discover that when people are sick, their white blood count goes up. Furthermore, the sicker people are, the higher their white count. And one sure sign a sick person is getting well is the white count returns to normal. What would the obvious conclusion from all this be? Well, obviously, elevated white counts make people sick! Disease should be treated by lowering the white blood count to normal.

So doctors and scientists would develop all sort of medicines to suppress white blood cell production. The first thing they would learn was that it took more of it than they expected because attempts to suppress white blood cell production meet with resistance. And no doubt these medicines would have unpleasant or even dangerous side effects. But no matter, the important thing is to suppress those dangerous white blood cells that are making people sick. And ultimately they would succeed. With much trial and error, they would come up with a treatment that got people's white blood cells back down to normal, no matter how sick they were.

And then an awkward little fact would come up. People undergoing such treatment always seemed to get sicker. But this would be brushed aside as secondary. So what if they keep getting sicker, that just shows how sick they really were. The important thing is that we got the white count back to normal, the most essential ingredient of good health.

And then someone would come up with an even more awkward fact. People whose white cells get brought down to normal seem to die more often and take longer to get well than untreated people. That would be really awkward. But in the absence of a theory to explain it, it would be brushed aside as secondary and unimportant. Obviously white blood cells are what is making people sick. Why else would white count so perfectly correlate with severity of illness?

More charitably, I might make the comparison with fever. Fever really is unpleasant to experience, and if it goes to high, it can be as harmful as the underlying infection. But ultimately, moderate fever helps fight disease, and fighting it only delays recovery. Perhaps this is the better analogy.

But either way, the difference is that we have a theory to explain why rising deficits and falling exchange rates are not the problem, but an essentially therapeutic response to the underlying pathology. And we have plenty of evidence that countries that allow deficits to rise and exchange rates to fall do better than countries that fight these trends. Heck, we even have an ideology that can explain these things as proper self-correcting mechanisms of the free market.

So why the urge to fight economic illness with fever reduction and white cell suppression?

Sunday, October 23, 2011

Should I Believe in SSA?

What is the matter with our economy? Keynesians say aggregate demand is insufficient and should be boosted by fiscal stimulus. Monetarists say monetary policy is too tight and we need an expansion. Debt deflationists say too much debt built up backed by inflated assets, and now that asset prices have fallen, we need to reduce debt as well. Austrians say easy credit led to bad investments that have to be shaken out, and that any attempt to soften the impact simply prolongs the pain. It is not necessary to choose between these theories; all may be seen as different ways of looking at the same thing. But they have another thing in common. All assume that the current economic downturn is not an isolated event -- the details of each crisis are unique of course, but all such crises follow the same general pattern and all have the same basic remedy. (This big disagreement is over what that remedy should be).

But there is another economic theory I learned in college, the radical economic theory of the Social Structure of Accumulation (SSA). The Social Structure of Accumulation is not specific technology, but a set of business organizations, labor relations, government regulations and services, banking structures and the like that form the social context in which technologies are used. This theory hold that industrial capitalism is inherently prone to crises, that such crises occur about once every 40 years, that each such crisis is unique, and the each such crisis means that the old SSA has worn out that that a new one must be adopted. It also holds that what goes wrong with each SSA is unique, and that any number of new SSA's are possible to replace the old one.

The class went on to describe such crises and their 40-year intervals. One took place during the bad depression of the 1890's. Another took place in the Great Depression of the 1930's. Another took place in the stagflation of the 1970's. In all cases, the economic crisis led to a political crisis and completing visions of what SSA should follow (the 1890's were the time of Williams Jennings Bryan, who was rejected; the 1930's saw serious Communist and fascist movements arise as possible alternatives) and one -- but not the only possible one -- wins out. Someone in the class, after hearing what causes each particular crisis, asked what caused such crises in general. The professor said, "Contradictions inherent in the system," not a very satisfactory answer. A better answer, I think, might be that just as the system outgrows old technologies, it outgrows old social forms. This no more proves the old social form was wrong than outgrowing a technology was wrong in its time. Its time has simply passed.

So, should I take this theory seriously? I will say this much for it; here we are, about 40 years out from the last crisis, and the next one has arrived right on schedule. If the theory of SSA is right, what matters is not whether we take a Keynesian, monetarist, debt deflation or Austrian approach; the important thing is what SSA we adopt.

And I will say this too, the Republicans have clearly taken the lead here. They propose that the problem with our economy is regulatory uncertainty, and that what we need to recover is a regulatory freeze, followed by massive rollback and huge tax cuts at the top. Less emphasized, they also appear to favor lower wages, less job-related benefits, much fewer government services, a more regressive tax system, and an economy and policy geared toward promoting the interests of the people at the top (job creators!) on the theory that what benefits them will benefit all. And what have Democrats offered as their alternative? Well, some expansion in access to health care and tighter banking regulations to prevent an recurrence, but otherwise not much. Occupy Wall Street clearly rejects the Republican view, but does not have much to offer as an alternative.

Whether SSA is valid makes a difference. Without it, people like me could take cold comfort in the though that even if the Republicans took power and implemented their apparent program of immediate, deep spending cuts, monetary tightening, and reducing the debt burden by stepping up foreclosures, the harm to the economy would cause equal harm to their political fortunes and thereby bring about a reversal. This would be so even if you believe (and I do) that Austrian squeezing out works, that once the economy hits its bottom, it will begin to recover. The Baltics and now Ireland are examples of successful bottoming-out and recovery, but the bottom has been painfully low and recovery can be painfully slow. Few countries have the patience for such things -- we certainly don't. But if the theory of SSA is true, then it doesn't matter. Any SSA, if successfully adopted, will work, including what the Republicans have to offer.

Just as I believe these different macroeconomic theories are best seen not as mutually exclusive explanations, but as different ways of looking at the same thing (even the the Austrian remedies are mutually exclusive from the others), perhaps standard macroeconomic theory and SSA can also be integrated. Paul Krugman has offered a possible answer by equating "structural reforms" in Greece with "microeconomic reforms." In other words, Keynesian, monetarist, debt deflation and Austrian theories of the business cycle are macroeconomics. The various business organizations, labor relations, government regulations and services, banking structures and the like that make up an SSA are microeconomics. The macro policies best suited to pulling an economy out of its immediate slump and the micro policies best suited to long-term growth are two separate issues. It is even possible for a single set of macro policies always to be the best for such a crisis* but micro policies to offer many alternatives, and to vary with unique circumstances. But this much is clear. Whoever offers the best short-term macroeconomic recovery in the short term will be best placed to bring about micro reforms over the long term. Time will tell.
*By this I mean a single set of macro policies being best in the wake of all bursting of credit bubbles. Obviously an inflationary crisis, such as we had in the 1970's calls for entirely different policies.

Wednesday, October 19, 2011


Watch this Jon Stewart clip. It perfectly encapsulates what I think about the extraordinary chutzpah of Republicans who are OUTRAGED that OWS is pitting Americans against other Americans. The best line of all is not Jon Stewart at all, but a clip he plays or Eric Cantor saying, "And believe it or not, some people in this town have actually condoned the pitting of Americans against Americans."

Now THAT'S chutzpah!

Monday, October 17, 2011

About Taxing the Rich . . .

One of the major demands of the OWS protesters is higher taxes on the top incomes. Conservatives say it is all the fault of Obama and the Democrats for demagoguing the issue. I am inclined to think there is something too that, although Republicans share the fault as well by insisting on balancing the budget through spending cuts alone, demand a more regressive tax system, and refuse to ask any sacrifices of the top earners even as they demand them of everyone else.

Where would I weigh in on all this. Well, for starters, let's put off balancing the budget until the economy is strong enough to take it. That being said, both parties are lying to us. Republicans are lying in saying that we can do it with spending cuts alone and Democrats are lying in saying that the only tax increases necessary are on the top incomes. We are going to need tax increases, and on the middle class as well as the rich. My own favored approach would be to return rates across the board to what they were when Clinton was president. And no, this is not pure partisanship. It is based on three things: (1) Conservatives are right that there is a limit to how high taxes can go before they start doing real damage, and I don't want to keep raising and raising them until we run into that limit. I would like to stop well short of it. (2) Although we don't know what that limit is, we do know that Clinton era tax rates are well within the margin of safety as evidenced by the fact that we tried them and the didn't hurt the economy at all. (3) Those rates actually balanced the budget.* Besides, given that most income growth over the past three decades has been at the top, and all evidence suggests that it will continue to be that way, it makes perfect sense to try to tap the main actual source revenue instead of something else.

At the same time, I do think that the conservatives have a point when they say that there is danger in allowing tax increases only at the top. Let's face it. The American people want more government than they are willing to pay for, and it is only going to get worse as the population ages and more and more people collect Social Security and Medicare. If the American people are unwilling to accept cuts or to raise taxes except at the top, then we will ultimately raise top rates high enough to really hurt us. I don't agree with the deep conservative aversion to "redistributionist" taxation, the view that taxes should operate as a sort of service fee with each individuals tax payments roughly equalling the services that person receives. I favor a tax system in which the rich subsidize the poor. But I also believe that people should understand that taxes and services are connected and that there is a tradeoff between them.

Conservatives, so far as I can tell, have decided that attempts to starve the beast merely by cutting taxes have failed, so we should now make taxes as painful and regressive as possible to build pressure for cuts at any cost. The OWS crowd wants to heap taxes at the top to avoid making painful but necessary choices. I acknowledge the need for those choices down the road, but would prefer not to make them any more painful than necessary.
*Yes, I know, Clinton had the advantage of an unusually strong economy, which is unlikely to be duplicated. There was also a major stock bubble. But even in 2001, after the bubble burst and the economy fell into a mild recession, the surpluses vanished but the budget remained balanced. It only fell back into deficits after the Bush tax cuts.

Sunday, October 16, 2011

So What Would I Do?

Let's take a start. I regard the apparent Tea Party program of massive government spending cuts, more regressive taxation, regulatory rollback and (probably) tight money as disaseterous. I regard the OWS program of raising taxes on the rich and punishing banks as understandable but not very helpful. So what would I say.

Basically, I differ from the Tea Party or OWS in accepting the bank bailouts as a necessary evil. My quarrel was with how they were done. If we had refused to bail out the banks and simply let the financial system collapse, I have no doubt we would be a whole lot worse off than we are today. My guess is the Tea Party would say that the free market would never allow that to happen. If it did happen, they ultimately would say that if a second Great Depression was the free market's will, who are we to quarrel with it. I would further guess that any OWS response would be even less coherent. I would also guess that to the Tea Party, their biggest complaint about the bailout would be the use of taxpayer money and the violation of free market principles. To OWS, it would be that banks have gone unpunished and that the rest of us have not gained anything.

It is a bit hard for me to weigh in on this issue because my understanding of finance is limited, but I would rather spend more money than see the bailout done right than less and see it done wrong. What would be my concept of doing it right? Once again, with a limited understanding of finance I would recommend:

Make the banks write off their bad debts. As we kearned from Japan, if banks refuse to write off bad debts, you ed up with zombi banks. This will no doubt mean a greater expenditure of taxpayer money to recapitalize the banks that would otherwise be the case, but if it actually puts them on a sound footing, it will be well worth the expense.

Meaningful mortgage relief. This would be the counterpart to writing off bad debts. Home owners would get the chance to crawl out from under the mountain of debt that is holding our economy down and banks, in turn, would have to write it off. Granted, this will lead to resentment that some people lived beyond their means and got away with it. To which I answer, so far as I can the overhang of mortgage debt consists of three things, (1) people who bought a house at a grossly inflated price because that was all there was, (2) financially unsophisticated people tricked into fancy mortgage instruments that harmed them, and (3) people who were lived beyond their means, either by buying a bigger house than they could afford or by using their house as an ATM. How relatively important were these three factors. I don't know. But the fact that underwater mortgages are extremely uneqully distributed, ranging from 70% of the total in Nevada to under 10% in New York makes me suspect that the first factor is dominant. Some sort of write down for categories 1 and 2, with a speed-up of the foreclosure process for category 3 would bring down the debt that is weighing us down. Again, it would mean more losses for the banks and therefore more money to recapitalize, but for the sake of ecnomic recovery, it would be well worth it.

Some type of reorganization of the banks to convey the message that they had a serious problem. By all accounts, banks were in deep denial that there was a problem. So were the auto companies. The auto companies went through a major reorganization. Now they are making better cars and (I bet) recognize that they had a problem. The banks are still in denial. (Of course, the two above might be enough to convince them).

Tougher regulations to keep banks from taking excessive risks. Once again, I don't pretend to know enough about finance to have the answers. But requirements would have to include leverage limits (increasing with increasingly risky investments), a testing period for new financial instruments, tough underwriting requirements before anything could be securitized, and better consumer information. I leave the rest to the experts.

Some type of reform in executive compensation. Conservatives worry (justifiably) about moral hazard, but our current system of executive compensation is moral hazard on two legs. Essentially, corporate management gets to decide its own pay, setting itself up to get bonuses if it does well and golden parachutes if it does poorly. (Besides, most top corporate officers have so much money that losing a big chunk doesn't much affect them). In the end, corporations don't make decisions; individuals make decisions. Individuals are also the ones who suffer the real consequences of mistakes. We need to insure that top management, which makes the decisions after all, feels the consequences of those decisions. That is the only way I know to prevent excessive risk taking.

My guess, now, would be that if I presented this list to OWS, some of them might think I was a sellout and a pushover, but others would take consider them a reasonable plan. I would further guess that if I presented this list to the Tea Party they would denounce it as an outrageous violation of free markets and economic liberty. (I have been quite impressed during this crisis at the extent to which conservatives take the assumption that the market knows best to mean that management knows best, and that if a company runs into trouble, it cannot possibly be because of mistakes by the management).

Why the Tea Party and Occupy Wall Street Can't Cooperate

Unsurprisingly, there have been comparisons between the Tea Party and Occupy Wall Street. Both are angry, outside the establishment (although the Tea Party is moving in fast), dissatisfied with the status quo and basically hostile to the whole idea of leadership and conventional politics and mad as hell about the TARP. Some have argued that their complaints are so similear there should be plenty of room for cooperation. There is even a Venn diagram showing their areas of overlap.
Here's why I don't think it can work. Both groups may have similar analysis of what is wrong witho our country, but their prescriptions about what to do about it are diamatrically opposed. That is a very poor basis for alliance.

Let me make a qualification here. I am not a member of OWS and therefore not qualified to speak for them. Nor do the comments of right-wing Republicans or Fox News necessarily reflect the views of the Tea Party. But so far as I can tell, both sides are angry about the bank bailouts. But since it is too late to stop them now, the question is what to do for the future. To OWS, the answer is to punish the banks, or at least extract a price for the bailout and impose tighter regulations. To the Tea Party, it is bad enough that we interfered with the free market by bailing out the banks, to ask anything in return or to tighten regulations would simply compound the error.

Conservatives complain, with justification, that OWS protestors seem to reduce all our problems to rich people not paying enough taxes. But then again, the Tea Party seems to reduce all our problems to government spending too much. The Tea Party brought calls to balance to budget front and center as the most important political issue. They also made clear that balancing the budget would consist entirely of cutting services to low and middle income Americans and possibly adopting a more regressive tax system. Asking any sacrifice from upper incomes was out of the question. Is it any wonder such views have generated pushback?

Tea Parties are angry at government. OWS is angry at corporations. I'm pretty sure OWS is angry at government, too. But for the Tea Parties, anger at corporations is, by definition illegitimate. Here is a fascinating article on Eric Cantor explaining why anger at government is legitimate, but any suggestion of criticism of the private sector is completely out of bounds.

This commentator sums up the problem well. "[W]hen it came down to it, what did Wall Street and corporate America ever have to fear from the Tea Party? Lower corporate taxes and regulatory rollback? Seriously?" And that has always been the Tea Party's potential problem. When people are angry over a bank bailout that hasn't benefitted them any, calls for lower corporate taxes and regulatory rollback has never been the most intuitively satisfying response. For forty years now, the Right has assumed that it has a monopoly on populism. That monopoly is now being challenged.

Saturday, October 15, 2011

Occupy Santa Fe

Well, I visited Occupy Santa Fe's demonstration today (as a mostly sympathetic observer, not a member). Here are some basic impressions:

  • The weren't marching or chanting, at least when I was there. They were just standing on the sidewalk, holding up signs.

  • Most of the signs were hand-written. Some were pre-fabricated. There were some unused signs for anyone who wanted to pick up.

  • There were a wade range of ages, but ethnically most people present were Anglo.

  • There were children, but they were playing on the grass, not holding up signs. Good! I have never approved of parents in demonstrations who make their children carry signs they don't understand. It has always seemed like child exploitation to me.

  • There were also carefully labeled recycling containers for people to throw their trrash.

  • Although there were some drums beating and a few costumes, it was nothing like a freak show.

  • The crowd was not that big, but a lot of people driving by honked their support or waived or flashed the peace sign. Not everyone, of course. The crowd often tried to elicit a response from motorists and were disappointed if they didn't get one. I didn't see anyone going by show hostility, but then, Santa Fe is a liberal town.

  • There were a few people talking about camping overnight. It appears a regular tactic of the movement is to trespass or camp past their pemit to provoke the police into overreacting. (It has been highly successful so far). There were no police present that I could see.

  • A few girls were using hoola hoops. Are those making a come back?

Wednesday, October 12, 2011

Why Frum is Still a Republican

Any readers I may have out there have probably noticed that I have become a follower of David Frum. He ran a recent column on why, given that his views on how to deal with the economic crisis are diametrically opposed to Republican orthodoxy these days, he remains a Republican.* Here I will paraphrase his reasons and my responses.

Republicans are the more nationalistic party and he regards such nationalism (even if "kitschy" at times) as essential to national cohesion. Um, dude, do you pay attention to actual Republican speeches? They don't use nationalism as a force for national cohesion, but for division. They use it to distinguish between authentic real Americans in heartland red states and liberal immitation Americans living in blue states. They equate patriotism with a huge range of cultural cues that intentionally divide and stigmatize. In fact, Frum has harshly criticized this sort of thing in the past.

Lower taxes, less regulation and limited social spending are the right policy in the long run. Well, as Keynes famously said, in the long run we're all dead. If Republicans are serious about immediate fiscal and monetary austerity, the long run recovery may be a lot longer than otherwise. Let's revive the economy in the short run now and worry about the long run later.

He remains a hawk on national security issues. Yeah, I kind of figured that was the main reason he was still a Republican. But really, our current defense expenditures equal the rest of the world combined. How much is too much?

He opposes subsidies to private companies like Solyndra. Maybe the Tea Party has changed everything, but up till now I don't see subsidies as solely a Democratic failing. More like both parties favor subsidies, they merely favor different subsidies. (And the whole thing takes place so deep in the bureaucracy I am not sure how much the party at the top matters).

He opposes affirmative action as harmful to both whites and minorities. I am open to persuasion on this one.

Republicans are the environmental party from Teddy Roosevelt to the senior Bush. You're voting for REPUBLICANS because you're an environmentalist?!? I guess Frum must be convinced Republicans will block and environmental initiative from Democrats, but once in power will have a Nixon goes to China moment. I'm not betting on it. This began with the junior Bush systematically blocking any attempt to fight global warming. By now, much of the Republican party is ideologically and theologically opposed to the notion that there can be any evironmental problems at all.

He hates public sector unions. Again, I am open to persuasion on this one. I agree the role of the public sector should be to deliver services, not patronage jobs. But I am not one of those people who thinks that economic progress can by achieved only by stripping labor of all rights. There must be some room for compromise here.

He's angry at Democrats for being soft on crime from the 1970's to the 1990's. Given that crime rates are continuing to fall, even as the economy tanks and states are being forced by budgetary constraints to release inmates, this seems kind of petulent.

"I believe that the elected Prime Minister of Israel is a better judge of Israel’s national security than the Assistant Secretary of State for Near East affairs. Democratic administrations typically seem guided by the opposite theory." Um, no the question is whether the US should run its foreign policy for the benefit of Israel or for its own interests. Frum is making his view on this point very clear. He may have broken with the Republican party on economic issues, but he is still a neocon. (Commenters on the site were especially harsh in criticizing this one, and rightly so).

He thinks Republicans will come to their senses on the ecnomy once in power, just as Democrats did on the War on Terror. Once again, he is still a neocon who does not regret anything Bush did in the War on Terror. Like so many Bush critics, I regard Obama's continuation of his policies as an act of betrayal, but don't know what to do about it. To what extent Obama's actions were simply manipulating a gullible base, to what extent they were any president's desire to aggrandize his own power, to what extent they were yielding to necessity, and to what extent they were about the difficulty of taking on powerful institutional interests within the national security bureaucracy I do not know, but I am inclined to suspect that last most. I believe it is true that Republicans will run up against the same difficulty in taking on entrenched interests if they come to power. Repealing the 20th Century or returning to the gold standard will mean taking on powerful interests, and I am inclined to think the powerful interests will win. I am also inclined to think that the Republicans will pursue fiscal austerity once in power, if only because plenty of other people, both here and in Europe, also favor it. Whether they will also favor tight money, a "strong" dollar, and financial deregulation I cannot tell.
*Although he does not discuss it, the economy is not the only point of conflict. As a secular Jew, he cannot be happy about the Republican party's strong association with Evangelical Christianity. And he has often criticized the whole culture wars approach, of which religious aspects are only a part.

Sunday, October 9, 2011

What Is It About the Scandinavians?

The difficulty with Keynesian economics is that it is counter intuitive. It goes against the grain to say that the remedy for excessive (private) debt is more (government) debt. People's natural inclination is to believe that if they have to cut back, government should cut back, too. Other remedies also run into resistence. The sort of monetary expansion necessary to power out after a major financial crisis meets resistence because it looks wildly inflationary. Debt relief meets with fierce resistence from anyone not benefitting from it. Making banks write off their losses means taking on on some of the most powerful actors in society who are well-placed to fight back. Krugman and others often despair of whether success is possible under democratic government. After all, Hitler was the most successful Keynesian of them all, and the government that gave the most successful stimulus following this most recent crash was China.

Yet there is one exception -- the Scandinavian countries. They seem to know how to handle this sort of thing within a democratic framework. One simply doesn't hear much about the Scandinavian countries duing the Great Depression. So far as I can tell, this was because they handled it better than most. They Scandinavian countries quickly left the gold standard and began large-scale fiscal stimulus, allowing their economies to recover while everyone else continued to struggle. (Of course, it helped that they had not been devastated by WWI and did not have any war debt).

The Scandinavian countries are also generally considered to have written the book on how to handle a banking crisis. Sweden forced its banks to write off bad loans, which allowed them to reemerge healthy. Norway acted even more forcefully, nationaliing failing banks and refusing to guarantee their liabilities. (It should be noted, though, that full recovery took longer and was painful).

This time around, the Scandinavian countries are once again held up as models. Norway has had the advantage of oil, and of tight banking regulations (enacted in respose to its last crisis). Sweden has also recovered very well after extremely aggressive monetary expasion, strong automatic stabilizers, and letting the currency fall. (Maintaining fiscal discipline in good times helped give the Swedes a buffer as well).

So the question is, why are the Scandinavian countries the only democracies that can act forcefully enough to handle the aftermath of a severe financial crisis. I can only assume the answer is that people there trust their government and institutions more than in other countries, and that their politicians are more willing to put the public good ahead of partisan advantage. (Read the link about how the Swedish parties maintained a common front in the face of the early '90's banking crisis and try to imaging American politicians today doing anything of the kind).

Why Doesn’t Anyone Remember the Debt Crisis of the ‘80’s?

As I watch Europe’s sovereign debt crisis play out, I get the most depressing feeling of déjà vu. We’ve been through this before. The historically-minded make comparisons to the crisis in the 1930's. Paul Krugman also talks about the Asian financial crisis from the 1990's. But I keep thinking back to the first debt crisis I was old enough to remember -- the Latin American debt crisis of the 1980's. What has that episode been forgotten? The parallels are disturbing.

That crisis had its roots in the 1970’s, when oil prices spiked and Arab countries ended up with way more money than they could absorb. So they put the money in banks and the banks, not knowing what else to do with it, made large loans to Latin American countries. In the 1980’s, the bill came due, and none of the countries could pay.

Crisis is perhaps the wrong word for what ensued, because it implies something urgent and quick. The Latin American debt problems dragged on and on and on. Year after year, they lacked enough income to pay their debts, so the IMF made loans to meet the immediate demand on condition that they undertake “structural reforms.” Structural reforms generally meant balancing the budget on the backs of the poor. The IMF’s outlook was generally that poor people eating was a hideous misallocation of resources and why were these countries squandering resources on their domestic populations when banks were facing shortfalls to their payments.

Prior to the "crisis," Latin American countries had experienced rapid growth, concentrated very heavily at the top with little benefit reaching the middle class and almost none reaching thepoor. Then, suddenly, the loans were cut off and the poor and middle class were informed that all that time they had been living beyond their means and would have to start making sacrifices. Asking sacrifices of the people at the top was ruled out because that would lead to capital flight. In short, the call was for a system in which people at the top received the benefits in good times and people at the bottom bore the burdens in bad times and were greeted with tear gas and billy clubs if they protested. All of this, of course, was hailed as the triumph of freedom and democracy.

Yet despite the obvious parallels with today, when I read Paul Krugman’s The Return of Depression Economics about international financial crises leading up to the present, the omission surprised me. Although he condemns the IMF for its handling of the Asian crisis in the 1990's for insisting that the affected countries squeeeze their domestic economies, he treats this as if it were in some way surprising. Why doesn't he mention that what the IMF did in Asia in the '90's was no different than what it did in Latin America in the '80's? Perhaps he thinks the IMF’s actions in Latin America in the 1980’s were justified to clean up badly mismanaged economies. Certainly, many of those countries tried to make up for the loss of foreign loans by printing money and saw inflation go from double digits to triple digits to quadruple digits, and sometimes even into quintuple digits. That kind of inflation does call for painful measures to stop it. And it is also true that ultimately the conservative forces emerged triumphant from the misery of the ‘80’s, broke the inflationary spirals, balanced their budgets, and restored growth. Maybe Krugman thinks it was all just as well.

Throughout the ‘80’s debt “crisis,” profligate Latin American countries were compared unfavorably to the virtuous Asian countries that grew at a mighty clip without running up a lot of foreign debt. Why couldn’t the Latin Americans imitate the more virtuous Asians? Why did they insist putting the needs of their domestic population ahead of attracting foreign investment? Then, in the late ‘90’s, the Asian crisis hit. Suddenly it turned out that Asian countries weren’t so virtuous after all. Suddenly they started being treated to the same lectures about the need to mend their ways as Latin America. Suddenly, once again, the IMF was asking them to squeeze, squeeze, squeeze and then couldn’t understand why their economies shrunk instead of growing. But the reaction was not altogether the same. Yes, Asian countries were blamed for being corrupt and not “transparent” enough. But people began to suspect that maybe foreign investment was a mixed blessing. Maybe, after all, you could get too much of a good thing. Maybe capital flows were turning into capital stampedes. Maybe some capital controls were in order to keep foreign capital out. And maybe the IMF prescription of squeezing one’s domestic economy as much as possible to please foreign investors might do more harm than good.

Furthermore, although the Latin American debt crisis was considered over, the Asian crisis ended up whipsawing back to Latin America yet again. Brazil, Argentina, and Uruguay all came under pressure and the IMF came back with its old formula of squeezing their domestic economies harder and harder to please foreign creditors. But foreign creditors seemed strangely uninterested in investing in economic devastation. This time the outcome was quite different. The crisis escalated much faster and became more acute. Argentine and Uruguay defaulted on their debts and devalued their currency. Brazil did not default, but found the IMF’s squeeze unbearable and devalued their currency instead. The political outcome was also differet. Brazil, Argentina and Uruguay all elected government of the (moderate) left that put priority on paying of their loans from the IMF to ensure it would not be able to meddle any more. All three have been prospering ever since. (Although if the world economy tanks again, all bets are off).

Other actors also seem to have been more affected by the Asian than the Latin American debt crisis. Asian countries limited their foreign debts, stockpiled foreign currency, and responded to the 2008 crash by fiscal and monetary expansion. And it worked; their economies bounced back quickly. And the IMF appears to have learned something and has been much less insistent that peripheral Europe squeeze their domestic economies than anyone else.

But, alas, everyone else seems intent on playing out the same mistakes that have been made over and over since the 1980’s. So I have to wonder whether we will learn anything from them and, if so, at what cost. Any why no one seems to remember that this drama has been replaying itself, again and again, at least since the 1980’s in Latin America.

Tuesday, October 4, 2011

Does David Frum Read Actual Libertarians?

It’s a bit late in the game, but I have long wanted to do a review on this essay by David Frum entitled, "Why You Wouldn't Find Any Libertarians in 1776." The most obvious answer is that the whole concept of free market economics didn't exist before 1776. It was first enunciated in The Wealth of Nations, which was published that very year. And, like most new ideas, this one took some time to catch on, let alone become as rigid and dogmatic as it is among some libertarians today.

Frum does not mention that, but instead lists four factors of the time that would counteract anything like modern-day libertarianism – “Latinity,” Calvinism, slavery, and material scarcity which he says are contrary to libertarian psychology. But his concept of libertarian psychology "each individual should enjoy the widest possible scope to live as he or she thinks best" places too much emphasis on libertarianism as a form of self-indulgence and not enough on it as a form of ruthless discipline.

Frum describes “Latinity” as an an 18th Century understanding of the Romans. He focuses on the emphasis it placed on the esteem of others – not mere popularity, but the esteem of the enlightened portion of the community. This, he says, is opposed to the Randian view of , “I swear by my life and my love of it that I will never live for the sake of another man, nor ask another man to live for mine.” Frum fails to emphasize another aspect of that viewpoint – its emphasis of public spirit and public service. A life devoted to personal material gain would have been utterly contrary to Latinity. He touches only briefly on Calvinism, to say that it emphasized the individual will as evil and the need for constraints. As for slavery, it is so obviously contrary to libertarianism as to require little discussion, although Frum also points out that the Founders who sounded most libertarian, like Jefferson, were often also slave holders.

But the factor that interests me the most, and that I believe is where makes his mistake, is material scarcity:

An American who drank too much, who had too many children, who got into a fight and suffered a wound that could be infected – in short anyone who did not tightly control his impulses – risked disaster not only for himself or herself, but also for his or her loved ones. In such a world, the psychology of modern libertarianism – the desire to live unrestrained by any force outside oneself – would be seen by most as an invitation to self-destruction.

Libertarianism is very much a movement of post-1945 affluent society America, a society that has developed birth control and drug rehab, antibiotics and antidepressants. We are a society abounding in second chances. 18th century America was a society in which a personal misstep could easily lead to premature and unpleasant death. Self-actualization through self-expression was a concept not imaginable until GDP per capita rose many, many thousands of dollars higher than the level prevailing in 1776.
To which I can only say, had Frum ever read anything, anything, by libertarians?? If so, how can he have missed the fact that many of them deplore government, not just because it constrains freedom, but because it protects people from the consequences of their actions or, as Frum puts it, because it offers second chances and therefore relieves people of the need to tightly control their own impulses? Moral hazard is a great libertarian watchword,* along with personal responsibility.

Granted, there are limits to this. I doubt that you would actually find libertarians who deplore the invention of modern-day antibiotics and wish that people still faced death by blood poisoning from a small wound. (Although there was an essay not long ago applauding a fire department for letting a house burn down, with pets inside, because the owner had not paid the proper fees. The author lamented the "squishiness" that material abundance brings and longed for a "crunchier" society in which people who made bad decisions pay the consequences). The point is simply that there is a punitive aspect to (a lot of) libertarianism, a wish for more self-restraint, not less, that Frum is missing.

*It is possible that this aspect has gotten more emphasis since the bank bailouts.