Whether you believe that we have unknowingly acquiesced in “The Great Risk Shift” described by Yale Political Science Professor Jacob S. Hacker in his book by that same name or whether you think we long ago ought to have engaged in a more formal and boisterous celebration of the “new and improved American economic system – less regulated and unionized, more globalized and entrepreneurial than the old triumvirate of Big Government, Big Business and Big Labor that preceded it,” as described by Mr. Brink Lindsay, Vice President for Research at the Cato Institute, almost everyone, who is a serious observer of our economy seems to have concluded albeit comparatively recently that the assumptions which have dominated the debate and political discussion of economic issues in the United States for the last three decades have collapsed. That collapse also appears to be accompanied by an unraveling of the consensus which formed 28 years ago that unbridled and unregulated free-market capitalism driven by free trade and increasing globalization was the engine that would propel the world’s increasing population to greater prosperity and per capita wealth both here and abroad.
The Collapse of the Deregulated Economy
Whether that was true can be and in fact was debated throughout the last quarter of a century. Indeed, it is fair to say that until the last few months that debate was won more often than not by the Republicans and “New Democrats” albeit not without dissent. Their persuasive “talking points” as columnist E.J. Dionne Jr. has pointed out included: “Regulation is the problem and deregulation is the solution,” “The distribution of income and wealth doesn’t matter ….Providing incentives for investors of capital to “grow the pie” is the only policy that counts,” “Free trade produces well-distributed economic growth and any dissent from this orthodoxy is “protectionism.” We all remember those, don’t we? Whether they deserve the mantle of being labeled as “economic theories” or are as E.J. Dionne has labeled them- “free market clichés passing for economic analysis,” clearly they are giving way because as business columnist and writer Steven Pearlstein notes, “The standard economic models are unable to explain a growing number of situations where highly competitive markets are delivering less than optimal results.
These “less than optimal results” are being noted not just by the traditional critics of the “entrepreneurial economy” such as Representative Barney Frank (D-Mass.), Chairman of the House Financial Services Committee when he says, “We are in a world-wide crisis now because of excessive deregulation.” This view is reinforced by Ben Bernanke the Chairman of the Federal Reserve who whatever political label you wish to attach him, cannot fairly be described as a “liberal.” Bernanke recently and on more than one occasion has called for “a more robust framework for the prudential supervision of investment banks and other large securities dealers.” In doing so Bernanke explained why the Fed needs more authority to get inside. The purpose of giving the Fed more authority is to get inside “the structure and workings of financial markets” because “recent experience has clearly illustrated the importance, for the purpose of promoting financial stability of having detailed information about money markets and the activities of borrowers and lenders in those markets.”
That sure doesn’t sound like he thinks as Ronald Reagan famously said that “Government is the problem” or that what we should strive for a more laissez-faire, deregulated and global economy. Nor are we hearing any more odes to Ronald Reagan’s economics from John McCain or any of the Republican candidates for any office. This development is particularly striking because it was only a few months ago, when the Republican presidential nomination was still contested that the one position all of the candidates had in common and stressed was their fealty to Ronald Reagan’s economic vision which the conventional wisdom views as being widely shared by the Republican Party base. Funny, how events and historical perspective can drive ideas in and out of the political marketplace in a representative democracy.
The historical perspective which is driving down the value of “Reagonomics” in the political marketplace in the year 2008 is that in the United States, as Columnist Steven Pearlstein points out, consumers have already realized most of the possible gains from importing different and cheaper goods. Therefore they know that any further liberalization won’t help them much. This coupled with the refusal of most federal elected officials to pay for meaningful and effective safety nets which are necessary to soften the dislocation and economic security that increased trade has caused many of our working families. This political decision has brought these folks to the realization that in turn they are the inevitable and so far permanent losers from globalization.
Steven Pearlstein also points out that trade is not the only area in which open, unregulated and lightly taxed markets have failed to deliver politically acceptable economic and social outcomes and conditions. Our health-care system which remains the most privatized and market-driven off any in the industrialized world is perceived by many voters as inefficient, unfair, and uncaring — a deadly political and policy prescription.
Deregulated energy markets are also blamed for not only being inefficient, but also for producing a speculative price bubble that has nearly brought the auto industry and the airline industry to their knees.
Finally, perhaps the most spectacular failure of unregulated or under-regulated markets has been the massive over-extension and misallocation of credit which went unnoticed unforeseen until recently. It is still not fully comprehended because of its complexity and because of the complexity of the financial instruments created to accomplish it. This led to the giant “housing correction” and the busted credit bubble which precipitated the “crisis” which this country finds itself in as this year’s presidential election approaches.
These developments crystallize what should be the dominant domestic political issue this year. That issue is what is the proper balance between economic efficiency and economic fairness and security? The determination of what that balance should be should not be left to ideologues of the left or right and it should not be based on rigid dogma which denies that tradeoffs are necessary. On the contrary it should be made by leaders who are tough enough and disciplined sufficiently to articulate the challenge and to address it with creativity and judgment.