Watching History Unfold

Jared Bernstein
Posted September 21, 2008 | 07:59 PM (EST)

You hear that implosion reverberating through financial markets? It's the sound of decades of conservative ideology collapsing.

This raises many pressing questions, both short- and long-term. What's the deal with the Paulson deal? There's a lot of well-aimed skepticism about this plan, and myself and my EPI colleagues will be commenting on it all week (I'm not liking what I'm seeing--not enough safeguards to protect taxpayers from banks perfectly happy to dump toxic debt on the government; not enough quid pro quos for Main Street). But for now, I'd like to focus on an even more important question: what next?

The week that just ended revealed the myth of market fundamentalism: the notion associated with mainstream, Milton Freidman'esque economics, and amplified by anti-government conservatives that unfettered markets will provide society with the best outcomes. Such simplicity, such elegance...such nonsense.

For many of us, it didn't take a market failure of the magnitude we've witnessed in recent weeks to belie this myth. We've been documenting the slow bleed of much subtler market failures for decades. Most recently, we've stressed that despite years of growth before the recent downturn, the real income of middle-class working-age families fell $2,000. Poverty rose. The share of the population without health coverage went up. For the first time in years, the rate of homeownership declined.

If that's Bush's ownership society, please don't sign me up (in truth, it's too late to refuse membership: as taxpayers, we're now proud owners of a growing pile of toxic debt--thanks, George).

But slow bleed or sudden shock, the idea that I've described as YOYO (you're on your own) economics is seriously on the ropes. I still encounter some old school ideologues on the CNBC airwaves, but they're fewer and more contrite, and, interestingly, they generally support the bailouts. Apparently, their mantra is actually "you're on your own; we're lookin' for a bailout." It's privatize the profits, socialize the losses; patriotism for the masses, socialism for the rich.

Such chatter will always be heard, but progressives have a rare opportunity to change the economic debate in this country by injecting some glaringly obvious truths into the fray, such as:

--Deregulated markets cannot police themselves; they tend toward speculation, vastly underpriced risk, and deeply damaging bubbles;

--An economy that generates growth while leaving most families behind is a broken economy;

--We can neither achieve broad prosperity nor compete globally without robust growth in key sectors which we have ignored or underfunded, including manufacturing, green production, and cradle-to-retirement public education; crafting evermore clever financial instruments will not pave the way to dependable, broadly shared growth;

--No private sector firm should be too big to fail; any firm of that magnitude must be nationalized;

--Capital markets are dysfunctional; borrowing and lending standards are ignored; lax capital requirements lead to constant over-leveraging; shadow accounts thwart transparency;

--We apparently can quickly find (or borrow) the money to do the stuff the authorities deem necessary, be it war or bailout; thus, we can also find the money we need for investment in people, from health care to education to infrastructure, etc.

--Supply-side, trickle-down economics does not work; it exacerbates already excessive levels of market-driven inequalities and defunds government, which leads to:

--Clearly, we need government to be amply funded; as is the case today, we will always turn to federal government to meet the toughest challenges, and if the money isn't there, we'll borrow from the future. This means taxes cannot only be lowered; they must sometimes be raised.

--For decades, under the spell of mainstream theories like "rational expectations" (bubbles can't form because prices can't diverge from reality for long), economists and policy makers have missed almost every big market failure, including the last two bubbles (in IT and housing). Government intervention is only "distortionary" in these models, adding the anti-gov't bias since Reagan. We desperately need policy makers and their economists to be much better analysts of markets and how they fail. It is not an exaggeration to state that much of what's gone wrong in the current case could have been avoided by better oversight, common-sense regulation, and clear-eyed analysis of economic indicators that should not have been missed.

If I were Martin Luther, I'd hammer such a list--and this is just a rough draft--feel free to edit and comment--to the doors of the Federal Reserve, but I'd probably get arrested or worse the minute I took out my hammer.

The point is that these are potentially transformational times.

Transformations evolve out of crises. As the great Robert Kuttner stresses in his new book, the big social movements that have transformed our politics have often resulted from the collision of brave, visionary leaders and major upheavals: Lincoln and the Civil War, FDR and the Depression, Johnson and the Civil Rights movement. Kuttner believes the stage is set for the next transformation, this time from a broken economy that threatens American prosperity to one that works for everyone.

After reading Bob's book, I sent him a note pointing out that it might well be a lot harder to motivate major change given the slow bleed we've experienced versus civil war, economic depression, or mass protests and burning cities.

But that was before the bust of the last few weeks, before the onset of a crisis of capitalism that is widely described as the worst market meltdown since the Depression, before the most aggressive government intervention into the economy I've seen in my lifetime. Maybe these recent events fail to rank with those motivating Kuttner's insights, but they're getting awfully close.

What has to happen to realize the transformational potential of the moment? It's quite amazing that this is occurring during the very moment in a pivotal election when a) the electorate is starting to pay attention, and b) the economy is the dominant issue.

The candidates are already grappling with these issues, both stressing some versions of the lessons I noted above, which is a nice way of saying McCain is adopting the mantel of reformer and regulator in order to convince pissed-off voters of his midnight conversion from a legislator who accommodated a lot of this damage to one who will fix it. But he's so changeable these days, even uninformed voters are seeing there not much there to his populist railing. It's all starting to sound like a pretty unhinged "I'll say anything to get your vote!"

Obama's got a head start. He's much less ideological about all this stuff, with a strong pragmatic bent and a willingness to listen to diverse views. He's also been talking for a while about the need to regulate financial markets, and his ideas are sound. Had they been in place, a lot of this mess would not have occurred.

But, as Kuttner stresses, that doesn't mean he will be transformational, or recognize the importance of injecting views like those above into the heart of the national debate. He certainly has that capacity--the vision, the intellect, and the ability to present the big picture.