Close of the market, 9/29/08
My political/economic socialization came during the heady days of free market zealotry. 1984 was a year when it seemed like many of my friends — who never cared for politics or economics in high school — found a new religion at college: free market economics. Fueled by the Reagan-era drumbeat that the free market can take care of itself, I had to suffer through endless panegyrics about how government regulation was snuffing the life out of a potentially vibrant economy that, if left to its own devices, would shower down the goodies of jobs, better pay, more products, and better services to the masses. The joy with which they talked about this new utopia had the conviction of an Amway convert in search of willing salespeople to join in on the pyramid scheme.
In the political realm, deregulation and lower taxation take the form of a V, where those at the top of the income bracket paid the least amount in taxes, creating favorable conditions for a surge in economic growth. It all seemed to be going as planned — even through recessions, and um, Bill Clinton’s tax increase (Shhhh!). The prescription for a good economy was to continually reward those at the top with a “less is more” approach. In good times, lower taxes. In bad times, lower taxes — and if you do, we’ll all get more in terms of a vibrant economy. One problem is that while people love the sound of lower taxes, they don’t really like it when their government benefits get cut — unless those benefits are framed in such a way as to evoke a negative response. Case in point, the term “Welfare.” I once explained to friend who was enjoying his free market high that I was on welfare (I’m such a buzzkill sometimes).
“Huh? What? Are you on food stamps?” He said.
“Nope,” I said, “I go to a state university and the good people of California pay taxes to maintain that system so I can get an education at a very discounted rate.”
“Well, that’s not welfare,” he snorted.
“Really? What would you call it, then? The free market?” I asked.
“Um no. I would call that an investment into the education of the citizenry,” He opined.
“Investment for what?” I asked.
“So you can enter the job market with a certain set of skills that have value, trade those skills for a job that will pay you money so you can buy goods and services and keep the economy going.”
“I don’t see the difference between what I call welfare and you call an investment.”
“It’s easy: you’re adding value to the economy, while people on food stamps who live in the projects do nothing, contribute nothing, but are more than willing to take government handouts,” He said.
It was the classic argument of the “deserving” and “undeserving” when it comes to welfare. Those who add value are deserving, while those whose lives are deemed failures, but ask to be rewarded for said failures, are undeserving. Over 20 years have passed since the free market bull sessions of my salad days, but one thing that hasn’t changed is the insistence that the free market is, at its core, the best system of economics.
Well, yesterday’s defeat of the $700 billion bailout of the financial markets could be seen as a win for the free market — if it weren’t so ironic that many of the people pushing the nationalization of the financial sector weren’t self-identified free marketeers. Paulson, Bush, and Bernanke are all supposed devotees and advocates of the free market, yet their knee-jerk reaction to the economic crisis was to float a huge government bailout that would cost taxpayers billions (if not trillions) of dollars. And for what? Well, according to Nouriel Roubini, an economist at NYU, “[The] rescue plan is a huge and massive bailout of the shareholders and the unsecured creditors of the financial firms (not just banks but also other non-bank financial institutions); with $700 billion of taxpayer money the pockets of reckless bankers and investors have been made fatter under the fake argument that bailing out Wall Street was necessary to rescue Main Street from a severe recession.”
Perhaps it was that level of sophistication many American voters used to communicate their concern to members of Congress about the proposed bailout. Um, yeah. More likely was the concern many members of Congress had about keeping their jobs, and they heard, in no uncertain terms from their constituents, that voting for said bailout was a one way ticket to unemployment — namely their own. Through all the bellows of complexity from those who, perhaps, had some interest in keeping taxpayers in the dark, a thumbnail narrative of how the bailout would work arose from the noise — and it went something like this: we (i.e., taxpayers) agree to take on billions (or trillions) of dollars of debt (because we don’t actually have the money for this) to buy “toxic debt,” let CEOs keep their golden parachutes, and let the government essentially run the financial sector because the smart guys and gals previously running the show ran it into the ground. In short, those who have failed to add value to the economy are being rewarded for failing.
My mind flashed back to that college bull session where I was treated to a lecture on the difference between the deserving and the undeserving when it came to welfare, and there was a wan smile on my face because I felt, in some way, a kind of economic karma has reared its head. My hope is that the financial sector recapitalizes on its own (and Roubini has some suggestions), or does so with some government help. My fear is that people, being people, will lose their cool and make a run on banks (as what happened to Washington Mutual), and we’ll be in worse shape than we are. Without credit (and I’m talking about the various types of credit available to businesses to help the in the short-term) the day-to-day economics of our system are in very fragile shape. If the free marketers really believe capitalism works best when free of any government influence, then one has to be willing to prove its resiliency in the worst of times — and not just flaunt its glories in the best of times.
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