This is me thinking out loud (on paper). Comments are appreciated.
During crisis we often see economics come toe-to-toe with ideology because government becomes a more openly active player in our lives. This crisis has been no different. It is one reason I saved a space in my credit crisis timeline to outline government action (see the part labelled "Government intervention" here.
Most people think of government action through the big versus small government frame. I have said:
When thinking about government and its role and size, there are three camps of thought.
- Big Government. Supporters of big government believe that government can do good. In this view, an increase in the size of government is not just warranted but necessary in a severe economic downturn in order to fill the void left by the private sector’s fragility. The large scale fiscal stimulus enacted in 2001 at the beginning of President Bush’s first term, in 2008 at the tail end of the Bush Administration, and in 2009 during the Obama Administration are examples of Big Government in action.
- Limited Government. People in this camp believe that government must always be held in check – even in times of economic distress. If not, a self-perpetuating bureaucracy develops, with a cadre of individuals dependent on government and wedded to institutions or programs which no longer have great value. In this view, expanding government is like moving to into bigger house; the new space must be filled with stuff, with size justifying the need for possessions rather than the need for space justifying the size.
- Small Government. Individuals in this camp see government as a parasite which, while necessary in small measure, always and everywhere raises the specter of despotism and cronyism. In this view, government must be kept as small (and as local) as possible because it feeds on society and on power to usurp property and wealth for its own use and that of its cronies.
Now, the big versus small government frame is often not a very good one in my view. When we think of government action, we really should be labelling specific economic policies as effective or ineffective and deciding on a course of action based upon this. For instance, While Lehman-style bankruptcies leads to systemic collapse, I have argued that the bailout hustle we have witnessed for the too-big-to-fail institutions was the worst of all possibilities.
Which is more free-market – a bailout and mega bonuses all around or asset seizure and recapitalization?
There is a price for bank failure in a capitalist society, you know. It’s called bankruptcy and seizure. The FDIC seizes and resells bank assets every week. That’s the right approach. But apparently, Lehman’s demise and the inadequate preparation for it scared everyone into bailouts – and that’s how it’s going to stay it seems.
–The Swedish banking crisis response or the bailout hustle?, Feb 2010
Is America turning Japanese then? In a word – yes.
But, what’s done is done. Nevertheless, I have a few thoughts on ideology and economics which I wanted to run by you. Right now I’m thinking mostly about two opposing concepts: ideological purity and hypocrisy. I first talked about this last December in Humans are built to be hypocritical based largely on a post by Robin Hanson. At the time, I said:
If I understand Robin correctly, he is saying that a leader or pundit who seems to make coherent but more inaccurate statements is better regarded than one who makes less coherent but more accurate statements. A June article in New Science summed this regard up as “Humans prefer cockiness to expertise.” What this means in practice is that ideologues (those who express extreme but more coherent views) are attractive because of the apparent coherence of their views – and I stress the word apparent…
reality is filled with contradictions that belie the apparent coherence of ideology. I have labeled the belief in strong versions of the efficient market hypothesis as misguided for just this reason. Markets are efficient and de-centralized and we should almost always prefer them to the heavy and coercive hand of government – the stress being almost always. So, when I point out my belief in the primacy of markets, I guess I am following Robin’s dictum of wanting to seem ideological to some degree. I hope I am also intelligent enough to know when ideology can lead us astray as well.
What I was trying to get across in that piece was my belief that humans build up two-dimensional models of how the world works called ‘ideology.’ As a result, most people gloss over the many unavoidable contradictions that real life offers. Jonah Lehrer puts it well when discussing personality and temperament:
It’s not that people don’t have personalities, or that these personalities can’t be measured – it’s that we aren’t the same person in every situation, which is what all these “tests” implicitly assume. It turns out that Shakespeare had it right all along. Just look at Hamlet – the Danish prince wouldn’t fit neatly into the categories of Myers-Briggs. He’s brooding and melancholy in one scene, and then violent and impulsive in the next. But this doesn’t seem strange to the audience. Instead, the inconsistency of Hamlet seems all too human.
Read More https://www.wired.com/wiredscience/2010/08/the-personality-paradox/#ixzz0wQKryPUU
Getting back to economics, I see ideology as very dangerous. It produces cookie cutter responses to complicated economic questions that can have catastrophic results. For example: does a lax regulatory environment lead to freer markets? For the past generation the answer to this question has been yes. But I see deregulation as practiced more of what I call ‘corporatism’ i.e. the favouritism of incumbent well-connected large organizations at the expense of individuals and smaller enterprises. As an aside, note that Ron Paul sees the Obama Administration as another corporatist administration favouring incumbents. Also see Obama should be pro-market, not pro-business by Jim Pethoukoukis.
Those of you who are buying the big business propaganda about Obama calling him a socialist fail to understand that large corporations want a free hand to continue run roughshod over individuals and small business. Rhetorically, this is a good approach by corporations because people buy into this.
And of course, the ideology the elites build helps to maintain this fiction. See my piece "A more in-depth description of how elites maintain status quo ante" for more in this vein.
Take net neutrality for instance. Here’s something from the blog A VC I agree with as a civil libertarian:
Somehow net neutrality got painted as "regulating the Internet" when it is really all about not regulating the Internet. Net Neutrality is about keeping the way the Internet works today; an open Internet where innovation is allowed and freedom reigns…
So now we have a situation where the access providers want to change the game. And they are seeking the regulatory approval to do just that.
Venture backed startups and venture capitalists don’t use regulations and lobbying as competitive advantages. We don’t have armies of lobbyists. We don’t have congress on our payroll. But the access providers certainly do. They have been regulated for a long time. They know how the game is played and they use it to their advantage. Regulation is their game. They want our government to regulate the Internet and they want those regulations written in a way that allows them to do what they want to do. A regulated Internet is a comforting thought to the access providers and a frightening thought to entrepreneurs and the ecosystem around them.
I don’t want to see the Internet regulated. I don’t want rules that require oversight and adjudication. But given that we now have an on ramp that is tightly controlled by a small set of access providers with almost identical interests, I would like to have one basic rule that is so simple that everyone understands what it means and we can simply follow it.
I expect the Obama Administration to cave in to the big telcos and give them de facto monopoly over the mobile Internet now that Google has sold out.
Sound familiar? This is exactly what the big banks are requesting, isn’t it? Remember when I said:
There is a price for bank failure in a capitalist society, you know. It’s called bankruptcy and seizure. The FDIC seizes and resells bank assets every week.
Why don’t too big to fail institutions go bankrupt? For the same reason you see access providers resisting net neutrality — because they are rent seekers who want government-regulated advantages.
Why does this happen? A researcher quoted by Science Daily makes an intelligent proposition which fits:
"Ultimately, patterns of hypocrisy and hypercrisy perpetuate social inequality. The powerful impose rules and restraints on others while dis regarding these restraints for themselves, whereas the powerless collaborate in reproducing social inequality because they don’t feel the same entitlement."
–Why Powerful People — Many of Whom Take a Moral High Ground — Don’t Practice What They Preach – Science Daily
Here’s a perfect example of what I’m talking about in a recent piece on Newt Gingrich and what he told his wife regarding the affair he was having while Bill Clinton was being impeached for the Monica Lewinsky scandal.
He asked her to just tolerate the affair, an offer she refused.
He’d just returned from Erie, Pennsylvania, where he’d given a speech full of high sentiments about compassion and family values.
The next night, they sat talking out on their back patio in Georgia. She said, "How do you give that speech and do what you’re doing?"
"It doesn’t matter what I do," he answered. "People need to hear what I have to say. There’s no one else who can say what I can say. It doesn’t matter what I live."
Rather than tie all this up in a neat and tidy bow, I’ll just leave it hanging and hope you respond in the comments. But, my overarching comments to all this are:
- The real problem in the U.S. has been government capitulation to large corporate interests in fields like healthcare, banking, real estate, defense, agriculture and oil and gas.
- The elites in America in both government and large corporations feel a sense of entitlement that exempts them from the rules. I see the Charlie Rangel scandal this way for example.
- The revolving door between government and large corporations reinforces this sense of entitlement by staffing elites in corporations and government with the same players.
- The result is a tilting of the playing field toward elites who accumulate wealth. The U.S. seems headed toward a Latin American style income distribution with a wider dispersion of wealth.
- There will be no substantive change to the financial system unless we get a full economic collapse. Financial interests are just too powerful now. Re-regulation has just meant greater power for regulators. None of the real systemic issues like too-big-to-fail are off the table.
- Elites are convinced they have it all figured out. They see themselves as the best and the brightest. That is why re-regulation has increased regulator power in institutions like the Federal Reserve rather than decreasing it (see A few comments on this blog’s harsher tone about the credit crisis for more on this).
Here’s how Glenn Greenwald puts it:
Let’s recall what former IMF Chief Economist Simon Johnson said last year in The Atlantic about what happens in under-developed and developing countries when an elite-caused financial crisis ensues:
Squeezing the oligarchs, though, is seldom the strategy of choice among emerging-market governments. Quite the contrary: at the outset of the crisis, the oligarchs are usually among the first to get extra help from the government, such as preferential access to foreign currency, or maybe a nice tax break, or — here’s a classic Kremlin bailout technique — the assumption of private debt obligations by the government. Under duress, generosity toward old friends takes many innovative forms. Meanwhile, needing to squeeze someone, most emerging-market governments look first to ordinary working folk — at least until the riots grow too large.
The real question is whether the American public is too apathetic and trained into submission for that to ever happen.
–What collapsing empire looks like – Glenn Greenwald – Salon.com
I say yes – the American public IS too apathetic.