Still aquiver from the series of moral orgasms induced in them by the financial crisis of 2008–09, progressives have not recovered sufficiently to think with any depth or imagination about our main economic problems. This is evidenced by a symposium published in the current issue of Dissent, under the heading “Beyond Stagnation.”
Dissent is one of the Left’s better journals — possibly its best, given The New Republic’s melancholy, long withdrawal into intellectual incoherence and The Nation’s metamorphosis into a lifestyle magazine for aging Champagne radicals whose primary interest is the pleasure of self-regard. Dissent is refreshing in that it shows the occasional sign of genuine intellectual interest in the Right’s ideas and in that it has resisted the pressure to disguise its ideological commitments as Ezra Klein–style pseudo-pragmatism. Rather, it forthrightly makes the case for a command-and-control economy and a totalitarian politics. (Its editors certainly would object to this characterization.) Dissent’s contributors have not yet got their heads around the idea that it is impossible to have a government that is simultaneously totalitarian and humane; if they had, they would not be part of the Left, which remains corporately committed to the principle that an effectively unlimited public sector can be put to excellent use so long as its masters have the right sort of moral cultivation. Conservatives, so often put off by the Left’s habit of deputizing its members as thought police, often fail to appreciate the real roots of that crusading inclination: It is not only that they wish to suppress their political rivals and nonconforming ideas, but that they believe it is necessary to establish, by whatever Pavlovian means are necessary, deeply ingrained habits of thought and speech that prevent the emergence of heresy among their own, in order that they may be entrusted with the awesome power that the Left’s politics would deliver unto them.
That being written, if you want to know what the Left is thinking, read Dissent. Even when, as in this case, it is disappointing.
It is worth appreciating that distaste for bailouts launched two very different political movements: Occupy Wall Street and the Tea Party. The intuition that there exists a dysfunctional and morally shabby relationship between Washington and Wall Street touches both ends of the political spectrum, particularly in their more populist expressions. Among those whose knowledge of these issues is more than can be written on a bumper sticker or a placard, there is a surprising level of agreement among people of very different political orientations: that we have not solved the problem of “too big to fail,” that the relationship between the financial sector and the political sector remains mutually corrupting and distorting, that prospects for non-elite American workers look relatively bleak, that this bleakness is in part a result of fundamental global economic changes but also in part the result of bad policy, that financial regulations have not achieved their desired outcomes, that familiar offerings such as education reform or manufacturing incentives are unlikely to prove sufficient meet to current challenges, etc. Given such potentially fertile ground, the Left’s failure to articulate a convincing reform agenda — or, perhaps more important, its apparent inability to even reevaluate its own longstanding assumptions about economic policy — is significant. A productive reform agenda will require fairly wide buy-in, among elites and ordinary voters both, and such a consensus will not be able to emerge so long as the Left remains mired in the assumptions of the 1930s. It is one of the great ironies of our time that the self-proclaimed progressives, who associate themselves with youth and change, are in effect, and more often than not in fact, a bunch of old men, intellectually exhausted and sodden with nostalgia.
“Beyond Stagnation” is introduced by Mark Levinson and John Schmitt, who are, respectively, the chief economist for the Service Employees International Union and a senior economist at the Center for Economic and Policy Research. Their aim, as they put it, is to move beyond recovery, if recovery means only to “re-create the conditions that led to the crash.” I am not aware of anybody espousing that as the goal of economic recovery, but perhaps this can be ignored as rhetorical throat-clearing. The broad outline they put forward is organized around: (1) The achievement of “full employment,” with the sensible observation that “workers’ bargaining power depends crucially on the unemployment rate” — supply and demand turn out to be important. One immediately begins to wonder upon which other targets they might deploy this analysis. (And one will be disappointed.) (2) Reforming the banks and the financial system, to ensure that “the financial sector works for the rest of the economy, not the other way around.” (3)A catch-all category comprising a special effort to look after the economic interests of African Americans and other minorities, an effort that rejects the notion that the problems in these communities are rooted in “self-sabotaging attitudes and behaviors,” along with two laundry-lists of pointillistic progressivism touching on labor laws and a feminist-inflected Great Society revivalism, e.g., child-care subsidies and other proposals from people capable of seriously writing the sentence: “New York City mayor Bill de Blasio has his finger on the pulse of a new vision for working families.” This last set of items, both in the introduction and in the article itself, has the distinct feel of an afterthought.
The full-employment article is written by Dean Baker and Jared Bernstein of, respectively, the Center for Economic and Policy Research and the Center for Budget and Policy Priorities. It is a work of magnificent crudeness. The authors note, accurately, that real wages — meaning wages adjusted for inflation — have stagnated or declined for many American workers, and then in the next breath they make three different cases for inflation: as a form of economic stimulus, as a tool for reducing the trade deficit, and as a means of devaluing debts. The belief that we can as a practical matter devalue the dollar without devaluing the dollars in which American workers are paid is pure superstition, and the offered rationale is illiterate: “If they expect a 4 percent inflation rate over the next four years, this means that they expect they will be able to sell their products for 16 percent more four years from now than they do today. This will give them more incentive to invest and a willingness to pay higher wages if that is necessary to get qualified workers.” That expected 16 percent premium is of course nominal; in real terms, getting 16 percent more dollars that have been devalued by 16 percent is a wash, i.e., in real terms there is no incentive at all. Mr. Bernstein holds a doctorate in “social welfare,” whatever that means, from Columbia, and he served as Joe Biden’s chief economist, a credential out of which one may make what one will; Professor Baker, who teaches economics at Bucknell, has a doctorate in economics from Michigan, and thus no such excuse to let such a sentence stand under his name.
The pair also suffer from a debilitating case of wishful thinking. Effectively, devaluing the dollar, as they correctly note, requires the consent and cooperation of foreign powers whose economic interests are not perfectly aligned with our own. China, especially, is not eager to see its currency appreciate relative to the dollar. Bernstein and Baker’s solution, offered with two straight faces, is to offer the Chinese intellectual property belonging to Microsoft and Pfizer as a buyoff for changing Beijing’s monetary policy: “There is undoubtedly a set of concessions that we can make to China and other countries that will persuade them to raise the value of their currencies against the dollar.” For example, “giving up other demands, like enforcing Microsoft’s copyrights or Pfizer’s patents. Or it means not pressing for greater access for J. P. Morgan and Goldman Sachs to overseas financial markets.” In reality, Beijing has shown itself to be effectively inured against foreign copyright claims. When a Chinese court found that the Shenzhen Reflective Materials Institute had ripped off Microsoft to the tune of some $300 million or more — not through any debatable patent infringement but through sheer piracy — it imposed a fine of $252. And as China continues to evolve from a cheap-labor economy to a technological, high-value-added economy, its interest in patent protection is growing rather than diminishing. Beijing’s stated goal is to see China become the world’s largest or second-largest owner of new patents, doubling its total in the coming years. Given the sorry state of Chinese banks, Chinese firms are looking to do business with overseas banks and financiers, in their own interest. If we’re going to seriously try to buy off Beijing, we’re going to have to think bigger: Think the Senkaku Islands, possibly, or Taiwan, neither of which actually is in our power to offer as tribute. The idea that we can bribe Beijing by turning a blind eye to software piracy and pharmaceutical patent violations is absurd.
Perhaps the authors are correct that there is some price that China would accept — but they give no attention to whether that price would be worth paying. And China is not the only foreign power whose cooperation would be required.
The shallowness and incoherence is consistent: Baker and Bernstein note, correctly, that workers at the lower end would benefit from having more annual work hours, and then they prescribe programs that would reduce their work hours, including a German-style work-sharing scheme. And they do so not only with the knowledge that these things will reduce work hours but with the intent of doing so, hoping to “give us all more time and a better standard of living.”
Jennifer Taub’s contribution on financial reform is hardly more illuminating. Professor Taub, who teaches at the Vermont Law School, sticks to the standard progressive narrative that the financial crisis was caused by the “deregulation of the early 1980s.” The problem with this version of events is that there was no deregulation. Banking has been and remains a highly regulated industry, one of the most regulated industries we have. The number of regulations to which banks and financial institutions are subject has not declined since the 1980s — it has grown. We have more regulations, and more regulators enforcing them, today than we did during the Reagan years. And we commit more resources to that regulation, as Veronique de Rugy reports: “Total real expenditures for finance-and-banking regulation rose 45.5 percent from 1990 to 2010, with a 20 percent increase in the last ten years. That spending rose by 26 percent during the Bush years, and by 7.1 percent in 2009. While these data do not say anything about the regulators’ effectiveness, it is reasonable to assume that a dramatic increase in their budgets is not a sign of radical deregulation.”
Professor Taub, predictably, favors Roosevelt-era regulations, especially the Glass-Steagall Act, the purpose of which was to keep commercial banks (the kind at which you have a checking account) and investment banks out of each other’s business. Glass-Steagall was set aside with the passage of the Gramm-Leach-Bliley Act in 1999, and progressives consistently blame that fact for the financial crisis, but no person familiar with the facts of the situation seriously believes that — even Elizabeth Warren has admitted as much.
Glass-Steagall kept commercial banks from getting into the investment-bank business, which may or may not be a good idea, but the firms at the center of the 2008–09 crisis were pure-play investment banks (Bear Stearns, Lehman, Merrill Lynch), an insurance company (AIG), and two government-run enterprises (Fannie Mae and Freddie Mac). Had Glass-Steagall been in effect, none of those institutions would have been subject to it. Of the commercial banks that found themselves in trouble during the crisis, few had any significant problems related to investment banking. Bank of America and Wachovia suffered from having acquired companies with terrible loan portfolios. At most, Glass-Steagall might have reduced some of the problems experienced by Citigroup.
The Left, daftly committed to its black-hats/white-hats model of economics, has never been able to account for the fact that the financial crisis was not the result of a criminal conspiracy; it was the result of financial institutions making bad investments.
This is a broader problem, the importance of which extends well beyond the analysis of the unpleasant events of 2008–09. The Left suffers intellectually from a retreat into moralism and, even more significantly, from a retreat into abstraction and aggregation. The financial crisis was not a “failure of capitalism,” but the failure of specific firms and specific institutions and specific individuals, the actions and motives of which must be understood to understand the broader phenomenon. It was a consequence not of deregulation, which never happened, but of misregulation. Regulations dating back to the progressives’ beloved 1930s created incentives for excessive investment in real estate, particularly in single-family houses, and the political desire to simultaneously maximize contributed to the deterioration of lending standards and the emergence of the dysfunctional subprime-mortgage market.
But the issue is even deeper than that. Regulation, particularly regulation of complex adaptive systems such as financial markets, presents a serious challenge that is seldom appreciated or understood. Every regulatory regime is explicitly or implicitly based on a model of how a particular system functions, but, for any system of meaningful complexity or sophistication, it is virtually impossible to develop a regulatory model that accounts for the effects of the regulatory regime on the system being regulated. (This is sometimes analogized to Kurt Gödel’s incompleteness theorems; whether that is an appropriate analogy I leave to the mathematicians.) The complex structured finance of the sort associated with mortgage derivatives and the like did not develop ex nihilo — it developed as a response to regulation and to political attempts to steer markets. We attempt to regulate markets as they exist, failing to account — and probably unable to account — for how regulation will change the behavior of the markets. Professor Taub seems to half understand this: She notes, for example, that when new rules were passed tightening leverage requirements, the share of securities that banks defined as being “held to maturity” dramatically increased — by 61 percent, in fact. Securities held to maturity are valued at their face price rather than being revalued at market prices when the value of those securities changes (“mark to market”), meaning that banks do not have to write their values down if prices decline, the effect of which is to make banks look as if they have stronger capital cushions than they would under a different set of rules.
Rather than admit that regulation is having unintended effects, Professor Taub retreats into moralizing, denouncing the banks’ behavior as “accounting tricks” and “gaming the system.” But these are not tricks or loopholes or games — they are the laws of the land and the products of regulators. If we could for a moment set aside the cheap homiletics, we could meditate on the fact that our current regulations are having certain effects, some of which are other than what was intended, and that other regulatory innovations also will have effects other than those intended, and that our power to regulate is limited by our inability to predict or account for how markets and institutions will react to that regulation.
This places progressives in a difficult position. To accept regulatory limits as facts rather than as political compromises means in effect to accept capitalism on its own terms or to adopt a nakedly totalitarian approach that in effect forbids economic innovation — not only in finance, but in every market subject to regulation. The former would oblige progressives to adopt a much more modest and market-oriented political agenda; the latter would oblige them to accept certain wholesale popular rejection of a political agenda that would amount to a retreat to 19th-century, Bismarckian regimentation, if not autarky.
The point of this criticism is not simply to point out that the Left’s thinkers are, as expected, wrong about the economy. Their being wrong is a matter of some importance. Doctrinaire economic libertarianism has long been, and will likely continue to be, a distinctly minority taste in American politics. The once-sturdy Republican program of tax reductions and deregulation has probably reached the end of its useful political life: A substantial slice of the population is much more concerned about whether they and their children will be able to secure decent employment at all than whether the top personal-income-tax rate is going to be 39 percent or 30 percent. The Right has been, for the most part, desultory and ineffective in its efforts to incorporate into its policy agenda the concerns traditionally associated with progressive interests: poverty, economic security for low- and moderate-income families, the effects of globalization, declining economic mobility, etc. The Left’s failure is its inability to account for economic reality; the Right’s failure is its inability to unify its free-market economics with social expectations of mutual obligation and solidarity. Its unspoken assumption that, barring some unforeseen development, some Americans are likely going to have to accept diminished economic opportunities as a consequence of pitiless and impersonal global economic forces is why Barack Obama’s “You’re on your own” caricature of conservative priorities, dishonest as it is, has been so effective.
“Beyond stagnation” is indeed where we, Right and Left alike, want to be. Conservatives can try to educate the Left and those who are attracted by its policies and rhetoric, and we can try to defeat them in the political sphere, which is of course necessary — but it is not sufficient. As a matter of political reality, we are at some point simply going to have to understand why a not-unsubstantial part of the electorate finds the Left’s policies attractive; as I have argued at some length, the conventional, popular conservative explanation — that the Left appeals to the lazy, the juvenile, and the unambitious — is at the very least incomplete, if not flatly wrong. Conservatives’ more thorough rooting in the dismal facts of supply and demand, scarcity, and tradeoffs may give us an intellectual head start, which would be much more exciting if this were a race. But it isn’t a race at all — it is a journey that all of us are going to have to take together.
— Kevin D. Williamson is a roving correspondent for National Review and the author of The End Is Near and It’s Going to Be Awesome.