Archive for Friday, August 12, 2011

Political dysfunction hurts economies

August 12, 2011

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Free markets, in theory, are supposed to be self-correcting. When they’re knocked off balance, changes in prices should gradually bring the system back to equilibrium. The same process of regeneration is supposed to operate with democratic political systems, too.

What we have been experiencing lately — in dizzying falls in financial markets, and the failure of political institutions to solve problems — is disorienting. But it’s a reminder that in the real world, systems that are knocked off balance do not automatically return to the center point.

This is a time of what we can call “undampened oscillation.” The system gets a shock, economic or political. In theory, this should generate forces of market adjustment or political consensus that restore equilibrium. Instead, the oscillation seems to get wider. A disruption that initially seems manageable gets bigger and more dangerous as the system oscillates up and down.

We are coming up to the 10th anniversary of one of the biggest shocks ever to the U.S. political system — the terrorist attacks of Sept. 11, 2001. Here, too, you can argue that the healthy dampers didn’t work. Instead, the initial tremor of the attacks was magnified by the reaction. The terrorist assault, horrible as it was, led to what historians are likely to see as an overreaction — two foreign wars and national exhaustion.

Think of our political-economic system as a top that has been knocked off balance: Rather than coming back to its center point, it has been wobbling ever more. Staying within our analogy, this is because the top has lost some of its spin. It’s less dynamic and adaptive.

It’s a comfort, of sorts, that economists and political scientists recognized these problems of disequilibrium a century ago. Indeed, the effort to understand market failure and social disorder helped create modern economics and political science.

It was the central insight of John Maynard Keynes that the self-correcting mechanisms of classical economics didn’t always work. Markets got stuck at less than full employment. The market forces that should have restored full use of idle workers and machines didn’t work — partly because individuals got scared and preferred to hold cash rather than invest in productive assets, no matter how low interest rates fell.

This was why Keynes argued for government intervention to nudge the economy from the low-output trap where it had gotten stuck. It wasn’t that he liked government spending, but that he recognized that markets sometimes overreact — amplifying the fears and preferences of individuals into collective behavior that makes everyone worse off. We have been seeing a contemporary version over the past several weeks, with frightened investors bouncing the global economy like a pingpong ball.

The lesson for Keynesians in the 1930s was that government intervention could compensate for market failure. A similar faith in government — not simply in the efficacy of fiscal policy, but in the ability of democratic political systems to solve problems — propelled the spread of American democratic values around the world after the defeat of fascism in 1945 and, later, after the collapse of communism in 1989. Free markets and democratic political systems weren’t just desirable; they seemed inevitable.

The scariest aspect of the current political-economic crisis is that it tests this faith in democratic governance. The political systems in the United States and Europe have proved unable over the past year to solve crucial financial problems. The political system has been no more self-regulating than the economic.

That was the real message of Standard & Poor’s downgrade of America’s credit rating after the debt-limit debacle. This was, indeed, a self-inflicted wound. It had two essential causes: the intransigence of Republican members of Congress who put their own ideology ahead of pragmatic solutions, and the inconsistent leadership of President Obama. I think Republicans deserve a greater share of the blame because they had an opportunity to avert the train wreck with the $4 trillion “grand bargain” on the budget and refused. But you can’t exempt Obama from blame: He simply has not risen to the challenge.

Europe, too, is a study in political dysfunction. It has been clear for years that you can’t have a single European currency but 16 different fiscal policies in the eurozone; this mismatch subverts the necessary process of economic adjustment for chronic debtors such as Greece. Yet the politicians of Europe haven’t been able to address this core weakness. Their failure is as acute as that of U.S. politicians.

What does that leave as political-economic models? China, Russia, India, Turkey? No wonder the world is depressed.

David Ignatius is a columnist for Washington Post Writers Group. His email address is davidignatius@washpost.com

Comments

cato_the_elder 3 years, 7 months ago

This piece is as behind the times as Obama's disastrous, failed Keynesian spending spree has been.

Ignatius has always been a doctrinaire WaPo liberal who thinks that Roosevelt saved the country during the depression.

As the result of Obama's failed Porkulus debacle and the huge increased deficits that he and liberal Democrats have run up in only 2 1/2 years, the American public has finally awakened to the fraud that is Keynesian Economics. They've had enough of chronic 9%+ unemployment, which Obama's advisers embarrassingly tell us is going to be the "new norm."

Americans want jobs, not Keynes.

Prosperity cannot be created by government. Prosperity can only be created by free enterprise, provided government gets out of the way. Will American voters continue to allow Obama and his henchmen to grow the size of government, or will they choose to grow businesses of all kinds and thus create jobs for Americans? We'll know the answer to that on November 7, 2012.

just_another_bozo_on_this_bus 3 years, 7 months ago

I agree. The sooner we can get to full-out oligarchy and corporfascism the better. Letting the little people have a decent income or benefits and any say in how government and the economy are run is a quaint but wholly unworkable idea.

Getaroom 3 years, 7 months ago

Cato - the elder of what? The biggest issue at hand is that the top is spinning out of control not because of Obama, but because the entire economy is "top" heavy with 1-2% of the wealth of this country being held in the hands of roughly 400 entities. Unless you are among those of the super wealthy class I wonder why you are hell-bent on shooting yourself in the foot? Gotta love the Brownbackward supporters and the GOP.

jafs 3 years, 7 months ago

Like the banks that borrow money from the Fed at virtually zero interest and then buy treasury bonds with that money, making a tidy profit from the government lending it's own money to itself?

Or the large corporations that have received federal bailouts, that distribute that money to the top executives, many of whom were responsible for the mess they got into?

Or the wealthy that take early Social Security payments, invest them, and return them, getting a nice interest free loan from the government in order to make money on it?

cato_the_elder 3 years, 7 months ago

Bozo and Getaroom: It's not the function of our government to redistribute wealth. No patriot who founded our country and fought for our freedom from Britain would ever have subscribed to such an immoral notion, which is nothing but legalized theft.

Those who are currently among the 9.1% unemployed and the 18%+ underemployed don't want handouts. They want jobs. The way for that to happen is for government to get out of the way of free enterprise, not continue to spend us into oblivion.

jafs 3 years, 7 months ago

The way for it to happen is for the private sector to stop sitting on piles of money.

According to a story I looked at this morning, companies aren't hiring because of lack of consumer demand - it's a vicious cycle - if people don't have jobs, they don't have money to spend, and then businesses don't hire, and people don't have jobs, ...

Meanwhile, there's tons of money sitting on the sidelines, and companies are maintaining record high profits by laying people off.

jhawkinsf 3 years, 7 months ago

"The way for it to happen is for the private sector to stop sitting on piles of money". As long as it's their money, they can do whatever they want to do with it. Right? Government, through it's policies can encourage people with piles of cash to behave differently, but one must ask why are they sitting on the sidelines now? Is it the immature behavior of government itself that causes a loss of confidence? Is it high taxes, coupled with anticipated low returns in these uncertain times that causes people to wait for better times? If we assume that investing that money would bring profits, then we can assume they would make those investments. The opposite is also true, if we assume that if the reward is not high, they will continue to stay on the sidelines. It's a delicate balance between government and those with the money. But a person or company deciding to sit on their own money is morally neutral. It's their money and they can do with it what they want.

jafs 3 years, 7 months ago

Well, there's a lot to be discussed there.

First, a bunch of the money is money that banks have borrowed from the government at extraordinarily low rates, that the government lent them in order to stimulate the economy. If they sit on it, it doesn't do that. Or if the banks then buy treasury bonds, and make a little profit on the money, that's equivalent to the federal government lending itself a little money and paying the banks interest on it. I'd say there may be a bit of a moral issue there. And some of it may be money from various bailouts - again, I'd say there's a moral question there - if we, the taxpayers, bail out a struggling business with tax dollars, I think we have some legitimate interest in how it's being used or not used.

Second, according to something I just read, the reason companies aren't investing is because they don't perceive enough consumer demand, which makes sense, but leads to the vicious cycle I mentioned.

Now, on to the last bit - if I have plenty of money, and somebody is starving to death, and I choose not to help them, is that really a morally neutral choice?

jhawkinsf 3 years, 7 months ago

I'll start with your last point. Starving to death is very different. But if I have a few bucks in the bank and choose to save it for a rainy day, for myself and family, is that immoral? I don't think so. Not every dollar needs to be spent, even if every dollar were spent, it would stimulate the economy, helping us all. With the issue of bailouts and such, the government provided these incentives. Looking back, perhaps they were ill conceived. Perhaps there were insufficient safeguards and regulations. We were told we were looking into an abyss. We were told the same thing with the debt ceiling. I for one am getting abyss fatigue. If that's how banks and financial institutions want to use the money, I'm not sure it's immoral. Suppose I wanted to take out a home loan, getting the mortgage deduction, and then use that money to invest in government bonds. Is that immoral or just good business? But suppose I owned a large restaurant chain and was sitting on a wad of cash. I went into a new market and said, "if you give me incentives, like an abatement, I'll hire carpenters and plumbers, I'll renovate a building, I'll open a new restaurant, I'll hire staff, I'll stimulate the local economy. If you don't give me the abatement, I'll keep my cash in my pocket, I'll wait for better times, I'll wait to see how the market plays out, I'll buy Canadian dollars or Japanese Yen". Jafs, you want them to take their money, I repeat, their money and you want them to invest it, to stimulate the economy. What should the response be of local government to the request for an abatement?

jafs 3 years, 7 months ago

"It's their money and they can do with it what they want"

"A person...deciding to sit on their money is morally neutral"

I'm trying to understand your analogy - you buy a house, and get a mortgage, then take the tax money from the mortgage deduction and invest it in government bonds? It's a good business decision, but since it's essentially the government lending money to itself and paying you interest, I think there's a moral question there. And a practical one - it would be better for the government to just keep the tax money - that way we don't have to pay interest on it.

But that example is more complex than mine - banks "borrow" money from the Fed at virtually zero interest, and then turn around and buy treasury bonds, making a nice little profit. No moral issue there? The idea of making money available easily to banks is so that they will lend, and invest that money in the economy, helping a bunch of people. It's not so they can lend the government its' own money and make a profit, helping nobody, and costing us more than if we'd just not lent them the money in the first place.

We've had this conversation many times - I do not believe in tax abatements, and I find the demand for them to be extortion, even in your own example. If you do what I want, I'll do x. If not, I'll take my money, jobs, etc. and go elsewhere.

You know, there was a time when companies didn't demand that sort of thing, and simply decided to open a business if they could find a good location, with good employees and a good customer base. And, they paid employees well, and offered defined benefit pension plans, etc. Things worked pretty well economically back then - one could raise a family on one income, work at a company for 30 years, and retire, having been a loyal and good employee at a company that did well.

What happened?

Now we have extortion, companies trying to pay as little as possible in wages, slashing benefits, etc. while employee loyalty is gone, and most people will not work at any one place for more than a few years, it takes two incomes, and it's still hard to raise a family with those, etc.

jhawkinsf 3 years, 7 months ago

"There was a time", a key phrase. Many things have changed. And I'm not just talking about the current economic crisis we find ourselves in. The global economy often makes it better financially to move jobs to distant lands. Monies can be moved here or there in nanoseconds. And if community "A" doesn't behave in a business friendly manner, the community "B" will. You can substitute many words for community, city, state, region, country. Some we can control for, some we can't. "There was a time" is a quaint notion, though I suspect with very savvy businessmen, it's a meaningless phrase. "There was a time" when individual responsibility held a more prominent position. "There was a time" when communities took care of their own. No welfare state, no SRS. "There was a time" when faith based institutions picked up those who slipped through the cracks. Do you want to go back to those days, or just some? As to the issue of the behavior of banks, it's behavior that continues to this date. If the government wants to change that behavior, it can regulate it. But I'm not sure you can blame the banks for the inaction of the government. Banks are publicly traded institutions and are legally obligated to maximize profits. They are behaving as they are obligated to. And I know your feelings about abatements. there are some issues I feel very strongly about and would never compromise. Other issues I'm perfectly willing to compromise on. I'm sure most people are like that. I just used that as an example of how we can entice a business to come off some of their cash and invest it. I know this is an issue you're not willing to compromise on, but then you can't really complain if this business sits on their money. And of course, if enough businesses behave like that, then the cost of an abatement will simply be felt in another way, through loss of business activity. We're really just picking our poison.

jafs 3 years, 7 months ago

I would be happy to return to a time that included good jobs/benefits, individual responsibility, and communities that took care of those that needed it.

That sounds very good to me.

The point there is that maximizing profits in those ways is inherently immoral - or at least there's a moral dimension to the question. I agree - we shouldn't let them do it - it's patently absurd - any money that comes from the government (ie. the taxpayers) should be required to be used as it's intended to be used. If all of the money that's been pumped into the private sector from the government were being used that way, the economy would be much better by now.

I say we stop enabling all of this behavior on the part of banks and other private sector businesses.

But the fact is that they're sitting on it because of concern about consumer demand, which is low because people don't have good jobs, and it's a nasty cycle. If we continue along that path, it just gets worse and worse.

Which is more likely? People just start spending money even if they don't have it, or businesses hire people, who then have money, and then can spend it?

cato_the_elder 3 years, 7 months ago

You obviously never studied Constitutional Law or American History.

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