19.12.07

FIFTIES NOSTALGIA TO THE LEFT OF ME. Not for saddle shoes or tail fins; rather, for broadly shared prosperity, which Robert Kuttner's The Squandering of America argues is the consequence of a coordination failure whereby the institutional restraints that at one time impeded the creation of wealth (unionized oligopolies, closed economies, and increasing marginal tax rates) were dismantled in such a way as to make the wealth creation easier and more readily appropriated by trading houses. That sentence doesn't quite stand by itself as Book Review No. 34. I note, however, that there are chapters titled "Wall Street Rules" (because a number of Depression-era laws were amended or repealed); "Financial Engineering and Systemic Risks" (where hedge funds are "a time bomb of risk"); "The Casino Continues" (referring to even more esoteric investment inventions); and "The Return of Speculative Global Finance." Mr. Kuttner may be right that trading markets have the potential to over- or under-correct, or to get caught up in rational expectations hyperinflations (more popularly known as "speculative bubbles"). It does not follow, however, that the Depression-era regulations will prevent such things. Complex adaptive systems do what they darn well please.

That noted, Mr Kuttner makes his case for that Fifties-style welfare state consensus. See pages 272-73:

You can put the entire Republican ideology on a bumper sticker: Markets Work, Governments Don't. This easy-to-grasp economic philosophy is complemented by a simple social philosophy: Poor People Reflect Poor Values. ...

This dual credo may have elements of truth when it comes to a small minority of dissolute poor, but it offers nothing to a broad, well-behaved working and middle class that finds itself working harder for less, in an era when markets often reduce security and living standards.

Let us praise Franklin, Lyndon, and the Croly Ghost.
Markets are useful engines of economic growth, but they are not reliable at providing employment security, much less decent wages, retirement, education, or health care. Nor can we trust markets to police the honesty of financial institutions, the cleanliness of air and water, the safety of workplaces, or the stability of the economy as a whole. So alongside markets, we need social investments financed with progressive taxation, as well as public regulation of the market's self-cannibalizing tendencies. A well-managed economy operated according to these principles can be at least as efficient as a laissez-faire one (which underinvests in people) -- and a lot fairer.
A now retired colleague would put the above in a bumper-sticker formulation: Liberals Protect People. The policy debate, however, must focus on the details. The deregulation and privatization of the 1970s and 1980s followed a painful coming to consciousness of the ability of a government to mismanage the economy -- thus stagflation and ever poorer performance of the common schools and ever-greater efficiency losses in the regulated industries. That "can be" is a claim; it is not a promise. Public policy, moreover, requires voters to consent to bundles of policies. As Mr Kuttner notes, Republicans bundle cultural populism with Friedmanian economics; Democrats bundle cultural idealism bundled unevenly with Pigouvian economics (the latter watered down in order to attract metrofexuals with trust funds.) He concludes with a warning.
[T]he failure to seriously engage with the downside of globalism has its own set of alarming political dynamics. As living standards fall for ordinary people, especially for socially conservative white male, blue-collar workers, the know-nothings gain more influence. We've already seen this in an anti-immigrant backlash. In the absence of a managed economy that offers balanced opportunity and security, vulnerable workers scapegoat foreigners and minorities. The elite, globalist Right is playing with social dynamite by not paying attention.
As, for some time, has been the elite, Europeanist Left. Mr Kuttner has just demonstrated the logic of Ronald Reagan's "I didn't leave the Democratic Party, the Party left me." We'll consider the influence of the "know-nothings" in a review yet to come.

The book has much to offer for policy wonks of all persuasions. It is extensively researched, although the absence of explicit footnotes annoys me.

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