04 December 2008

Strange Inversion of Economic Conservative and Progressive views

When thinking about economic policy and where it needs to go, I'm struck by how it's become typical of our world that terms are inverted: up is down and down is up. "Economic conservatives" is a label used for people who promote, with zeal sometimes amounting almost to religious fervor, licensed speculation and side-betting on the economy, and trade regimes that result in the wholesale dismantling of production capacity. Their rationales for such policies sound good, until you realize that they're based on false assumptions and demonstrably untrue principles, such as that tax cuts always result in greater net revenue, and many others.

Economic "progressives," on the other hand, tend to believe in old fashioned, tried and true economic postulates like these:
  • An advanced economy, with a rising standard of living for the majority of its citizens, cannot be sustained by trading alone, still less by financial speculation, still less by trading in derivatives from the actual transactions that take place in the "real" economy. Derivative trading creates bubbles and inevitable collapses, often huge ones, as is happening now. Production, not only of services, but of goods, is the real engine of economic growth and sustainable prosperity.
  • "Free Markets" are largely fictions, which, to the extent they exist at all, must be regulated to ensure that financial transactions are not only fair, and reasonably transparent, but that excessive leveraging and "side-betting" (e.g. credit default swaps) are not permitted. At all. These have been seen, very clearly in recent events, to have extremely deleterious effects on the proper functioning of the financial system (i.e.,the allocation of capital and the fostering of the utilization of capital to create growth and overall prosperity).
  • "Free Trade" is largely a fiction as well. Governments regulate trade in lots of ways, and the results should be controlled, to the extent they are controlled, not for the benefit of traders and speculators, but to foster the health of the production economy and its employed workers. This is a simple matter of national interest, and it is practiced by every successful and growing economy in the World.
  • An inevitable result of an economy based primarily on financial activity is increasing public debt, which is ultimately unsustainable.
(This is because, in a very real sense, the trade deficit and the budget deficit are inseparably linked in a positive correlation, and eventually the size of the debt will cause the collapse of confidence and cause this form of "growth" to lurch to a halt. Then, if we haven't developed energy independence and a program to restore a production economy, we will really find out what 21st century depression looks like).
  • Paradoxically, the only way out of a depression created by the foregoing problems is increased and sustained public spending, over the short and medium terms, but it must eventually be followed by recognition that the global economy depends on at least relative balance, and our trade and budget deficits cannot expand forever.

I am very concerned, as I've intimated elsewhere, that these are not the postulates, nor the implied goals, of the majority of the new president's economic advisers.

U.S. economic policy in the past thirty years has been an abysmal failure from this traditional point of view: it has tended to destroy the health of the production economy to the (temporary and unsustainable) advantage of the financial economy, resulting in huge wealth transfer from the former middle class to the plutocrat class. This looks from a long term perspective like nothing less than a giant rip-off. The middle class in America is on life support, as a result of this wealth transfer.

I've noticed that many very traditional "conservative" economic thinkers, while clinging to their belief in the panacea of so-called free markets, nonetheless have come around to agreeing pretty much entirely with the predicate of bullet point two above. Many people have come to recognize that even if you believe, philosophically, in relatively unrestrained capitalism, you have to have some rules to keep the transactions in the arena that actually results in positive economic activity, as opposed to simply gambling. Much of the activity that fueled the recently collapsed bubble was exactly that: side-betting on the outcomes of uncontrolled, unassessed, and incredibly risky securitized lending. This kind of activity is inherently destructive and must be eliminated from the universe of legal economic activity.

Some of what Pres.-elect Obama says is encouraging. He seems to favor investment in infrastructure and renewable energy to end dependence on fossil fuels. But I'm not sure he has a full-fledged commitment to, and understanding of, the need to restore the American economy to a production basis, or of the methods, in use in places like Scandinavia, to ensure that the economy is not only productive, but that it remains high-wage, and high standard of living, for the segment of the population which is actually engaged in production. Trickle-down economics has completely failed, and it's time to dump its paradigms and postulates entirely, and to adopt principles which have been shown to work elsewhere. We need to recognize that without some long term planning and, (quel horreur!) dirigisme, i.e., control over the direction of investment and such things as the health care "industry" and the energy and transportation industries (as examples) to promote public policy goals, there can be no successful restoration of a solid basis for long term prosperity. Also, of course, a regime of carefully balanced re-regulation needs to be imposed to control the financial markets.

Along these lines, the restoration of Glass-Steagall, which used to prevent banks, insurers, and investment houses from being the same people, needs to be a top priority, as do restoration of strict leveraging limits and the blanket outlaw of trading in transactions that amount to nothing more than wagering, involving no actual capital involved in production, which has been so destructive in the most recent bubble. As a friend who knows this stuff better than I do says, otherwise, we will simply "wash away in a sea of debt." (He undoubtedly doesn't agree with much of the above, especially about the necessary role of planning and direction of the production economy, or the necessity of suspending concern about the national debt for the duration of the worst of the emergency in order to inject money into the economy, but I think he'd agree with the other conclusions, and with the need for some serious sheriffin' to get the miscreants back in line).

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