A brief note on Corporatism
This post is designed to be a quick hit but I wanted to put up a few thoughts on corporatism, stimulus and austerity. Consider it an extension of my post "Corporatism masquerading as Liberty". I intend to argue that corporatism is integrally related to the policy options available to an economy experiencing a secular deleveraging. As I was writing the last post on the flow of funds and deleveraging, I re-read an early post I had written on why stimulus is no panacea which prompted some of these thoughts. Let me bullet point this to make it quicker.
- Minsky’s theory of stability leading to instability is the heart of any analysis of secular leveraging and deleveraging cycles. What happens is that a long period of stability leads to an increase in leverage and risk in the private sector. My take is that it’s like increasing the safety of cars leads to an increase in driving speed; people naturally force the system to its operational limit.
- Government officials are not immune to this push to the operational limit. Eventually, regulation becomes lax and easy money enters into the picture. Look at the contrast in statements by Fed Chairmen Ben Bernanke and William McChesney Martin as prima facia evidence. Inflationary monetary policy leads to an expansion of credit throughout the economy, the basic building block for a boom-bust business cycle.
- Easy money is always bad. Deregulation is toxic when combined with desupervision and de facto decriminalisation as Bill Black calls it. If you are going to deregulate, I say increase regulatory oversight at least through the first business cycle. That would have saved us a huge headache on investment bank leverage, mortgage-backed securities, the proliferation of ARMs, and CDOs.
- What also occurs here is that the government becomes captured by the Corporatist. Certain favoured sectors insinuate themselves into getting special treatment. The ‘Corporatist’ is a kleptocrat interested in furthering the gains of himself and those allied with the corporatist and at the expense of others, by coercion if necessary. The Corporatist tilts the playing field in his direction by either getting government to look the other way or to tip the balance in his favour.
- The inflationary monetary policy of the government is extremely distortionary and favours the Corporatist as it redistributes capital to economic actors whose costs rise after they receive income i.e. the Corporatist and his allies from those whose costs rise before their income i.e. everyone else. Those who live from a fixed and interest income like pensioners find their costs rising with higher inflation while their income decreases in real terms.
- When profits run up in those areas in favour, many of the the Corporatist’s allies sell out to the general public as investment capital and human resources flock to those endeavours. Eventually, investment opportunities dwindle as the favoured sectors suffer overcapacity.
- Some turn to fraud and obfuscation to keep the gravy train going. When the malinvestment can no longer be sustained, souring investment returns are unmasked and wide-scale fraud is uncovered. And when the asset price bubbles pop, revulsion steps in, credit contracts and the bubble currency depreciates, as hot money flees the depreciating assets.
- An expansionary monetary policy in a post-bubble environment can cushion a hard landing but does only lengthen the period before full economic recovery. Captured by the Corporatist, the government attempts to revive the status quo ante via bailouts and stimulus instead of using stimulus as a way of cushioning the downturn and increasing employment as the economy re-balances which means inequity is apparent in much starker detail due to the gravity of the downturn.
- The populace becomes angry. Stimulus is no longer supported. Austerity rules. What if the banks had been bailed out under harsher terms or nationalized? How would that have affected the political debate today?
- Depression ensues as it did in 1937 in the U.S. and 1997 in Japan. Insiders are prosecuted for malfeasance. Incumbent government is overthrown.
This is basically the view I have maintained since I wrote The recession is over but the depression has just begun. I would appreciate comments.