Saturday, June 5, 2010

This recent post from Peter Droman at the EconSpeak blog: A political Economy Moment reminded me that I have wanted to make a post about a philosophical problem with the debate about fiscal policy and the role of government.

I think it is in some ways unfortunate that economics is caught in a Keynesian/Monetarist (or classical) binary. Broadly speaking the debate is about whether government can have a positive effect on the workings of the economy. The problem is that this binary does not capture the full spectrum of attitudes towards government and it causes some philosophical problems for any leftists cum economists. Tiny, tiny, minority they may be.

Simplistically speaking, I subscribe to the Marxian point that the state is a "committee for the management of the affairs of the bourgeois". Oddly, I think there is a lot of overlap in the way I see the world as your walk-a-day libertarian who similarly sees governments as constraining the potential of the world. In fact, the idea that governments are simply the tools of corporations is a large component of libertarian ideology. After all such things as bailouts, "regulatory capture", and even the Fed are all seen as distorting the playing field in favor of the politically connected few. I find myself more often than not nodding in agreement with libertarian or Hayekian critiques of how the current system is managed.

Libertarians, however, lose me when they start prescribing solutions. In a nutshell their solution to the problems with capitalism is simply more capitalism. The intellectual work is simple, governments distort the natural process of the market and once the market is set free from government control manna will rain from heaven.

But what if you don't believe that the solution is more capitalism? Solutions become very messy. The problem is that, in a universe of atomistic firms and households (the world of the economist) the only point of conscious intervention in the economy is government. So we are stuck putting lipstick on a pig so long as we are forced to defend the efficacy of government. I, personally, am willing to hold my nose and pull the lever. A defense of government intervention is--baring some kind of miracle of theory or reality--a defense of conscious intervention into our own history.

However--and I want to point out I'm not entirely cynical about this--there is always an endless stream of caveats. For instance, from the EconSpeak post above after talking about the "center-to-left prescription for the recession Mr Dorman goes on to point out:

In a sense yes: those who make the decisions summon economic arguments to justify their actions. But who gets to make the decisions and what arguments they find appealing is not the outcome of academic seminars. What got us into this mess in the first place, and what now threatens to throw us back into the maelstrom, is the political hegemony of the “finance perspective”, the interests and outlook of those whose main concern is maximizing (and now simply protecting) the value of their financial assets.

Within the world of elite interests, this is almost a mass constituency. While the bulk of such assets are held by an infinitesimal few, perhaps the top 10-20% of the population in the industrialized countries have significant financial wealth and actively monitor their returns. Their understanding of how economies work and what priorities policy-makers should adhere to follow from their personal position. Inflation is a constant threat to asset-holders. They fear the laxity of central banks as well as the buildup of government debt, which can serve as an incentive to future inflation. They want their portfolios to have a component of absolutely risk-free government securities, and the very whisper of sovereign default chills them to the core. They believe in the inherent reasonableness of financial markets and believe that anyone who wishes to borrow from them should demonstrate their prudence and fiscal rectitude. They were willing to relax their principles temporarily during the panic, but now that they have caught their breath they want to see a return to “sound” practices. Governments will bend to their wishes not because they have better arguments, but because they hold power.

How do you get business done in such an environment? I have found myself disagreeing with Paul Krugman's call for a larger stimulus. It seems that within a democratic system the nature of compromise necessarily means any kind of stimulus would be too small. Whats more, the mishmash of the stimulus bill was qualitatively inadequate. So why should we insist that congress mismanage more stimulus? Here, though, it is not just my politics but my professional chauvinism that finds the process aggravating. As a side bar, I'm fairly certain that the last generation of economists have been preoccupied with monetary policy not only because the stagflation of the 70s was their founding trauma but because monetary policy is largely the sole technocratic purview of economists. Anyway, disagreeing with the call for more stimulus then means retreating into a weaker position that "in theory this would work."

The real solution to this impasse is not intellectual. It's political, for those of us who desperately do not want to be cynical about the role of government also have to assume that it is possible for political life to operate properly. What we ultimately need is a government--while not perfect--is something that can be believed in and trusted. I feel a great nostalgia for the immediate post war era when governments had proven they could respond to a crisis and there was--even in the US--a consensus about the legitimate role of government in economic life.

The 70s of course changed all that. The documentary filmmaker Adam Curtis' four part "The Century of the Self" traces the individualism of the baby boomer generation from its political expression to its transformation into "lifestyle consumerism" in which individualism get channeled and expressed through differentiated consumption goods. Curtis contends that Ronald Reagan's declaration that "Government is the problem" spoke precisely to this individualism which had been shaped over the turbulent and dysfunctional national politics of the 60s and 70s but had become cynical and satiated. I think, in a way, that process has been repeating itself or I suppose it is the new political reality. The new rise of libertarianism seems to be siphoning off significant proportion of people who should be properly left leaning. The critique is the same either way you go but but leaning right offers a simple and consistent prescription. Unfortunately, in the absence of something simple and coherent a functioning left requires some kind of demonstrable proof. That proof has been fairly short in coming over the last 30 years as Reagan's prophecy fulfills itself.

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