Saturday, March 5, 2011

The Past and the Future

Sowell returns to the imperfections of government in the final chapter, reminding us that while perfect regulation might have prevented the crisis, no such thing exists anymore than do perfect markets, perfect people or perfect decision-making.  The problems that nearly torpedoed the global economy were caused in the first instance by borrowers mass failure to make mortgage payments, a failure made possible by GSE quotas for the purchase and promulgation of shaky loans, as well as more direct political pressure on lending institutions to make them.  In short, the boom and bust were caused by governments' carrots and sticks.  Government is not the public interest personified.  Rather it is the political actions of elected officials, to whom Adam Smith referred as "that insidious and crafty animal, vulgarly called a statesman or politician, whose councils are directed by the momentary fluctuations of public affairs."  Today's problems are the consequences of yesterday's quick-fix solutions to "perceived" problems.  As stated previously, "[f]acts have no such coercive power in politics as they have in markets... [The ultimate reality for elected officials] is what most voters believe, or can be induced to believe."  Where market survival often requires acknowledging mistakes and changing course, political survival too often requires "denying mistakes, continuing the current policies and blaming the bad consequences on others."

No policy goal is categorically good, including homeownership.  In the real world, costs and risks always have to be considered before making such an assessment.  "These costs and risks were ignored, downplayed or dismissed by politicians and social crusaders during the housing crusades that led to the boom and bust."  Politicians created a problem that didn't exist--unaffordable housing--outside of a few areas where people had to pay half their income to buy a modest home, and resort to exotic mortgages in order to do so.   In the 1990s, when the political crusade took off, Americans  on average were spending just 17% of their incomes on housing.  The number was 30% in the early 1980s, and still only 22% in 2005.  Yet, "[f]ew things blind human beings to the actual consequences of what they are doing like a heady feeling of self-reighteousness during a crusade to smite the wicked and rescue the downtrodden."  The presumed boogie man here was racial discrimination in lending--as if to say that "greedy bankers" were somehow not willing to make a profit off minority borrowers without government suasion.  When the floodgates to reform are opened, however, it's no longer possible to control where the water will flow.  In this case, the unintended consequence was a housing market collapse.  And while the creative financing and lax lending standards that fueled the crusade have stopped, "even the ensuing national crisis did nothing to end the political attractiveness of the goal of making housing affordable by government fiat, rather than by individuals buying or renting housing that was within their own income range."

The national retrogression to a "New Deal ideal," and the resuscitation of Keynesian nostrums are hardly harbingers of recovery and progress.  "This is equivalent to what FDR had to save capitalism from its own excesses," crowed Barney Frank, a key architect of the ruin.  Sowell reminds us that unemployment exceded 20% for the first 21 months of Roosevelt's administration, and it never fell below double digits for his first seven years.  The government created vast numbers of new jobs, but at the expense of taking money from the private sector and creating less demand and less employment there. The market had been trusted to end prior recessions and depressions, none of which proved to be as persistent, deep and long-lived as FDR's great depression.   The New Deal did "create a large class of people beholden to government," however, and the political--as opposed to economic--success of the New Deal is indisputable.

Two months after the October 1929 crash--the event regarded as the depression's catalyst--unemployment peaked at 9%, but subsided over the ensuing months to 6.3% by June 1930.  In June of that year (under President Hoover), Congress passed protectionist legislation in order to foment employment, the Smoot-Hawley tarrifs.  By November of that year, one year after the crash, unemployment reached double digits for the first time at 11.6%, and didn't see single digits for the remainder of the decade.  Smoot-Hawley was followed by FDR's legislative onslaught: The National Industrial Recovery Act of 1933 (wage and price controls); The Agricultural Adjustment Act of 1933 (price and output controls); The National Labor Relations Act of 1935 (union enshrinement).  The point of the exercise was to create enduring institutions that would transcend current economic conditions to fundamentally transform the way the American economy operated.  "Thus we are, in the twenty-first century, paying agricultural subsidies to millionaires and billionaires because of a program created during the Great Depression to help small farmer who were having a hard time.  Again, once you have opened the floodgates you cannot tell the water where to go."  Uncertainty regarding the actions of government deterred business investment, and wound up prolonging the depression by several years.  It didn't end until "Dr. New Deal" was replaced by "Dr. Win-the -War" (in Roosevelt's own words), twelve million men were taken out of the work force to serve in the military, and cost-plus government contracts guaranteeing a profit were given to producers of war materials.  It was not ended by deficit spending in 1940 as many claim.  Unemployment at the time was 14.6%.  But, the deficit was higher in 1936, as was unemployment with the rate at 17%.  Were deficit spending the key to recovery, the economy would have recovered in 1936, not 1940.

Several lessons can be learned from that epoch.  The first is that "massive and unpredictable government interventions in the economy create uncertainties... [In such environments] people tend to hold on to their money.  The velocity of circulation of money slowed down during the Great Depression, just as it has today."  It is instructive that President Ronald Reagan did not intervene in 1987 when the stock market crashed in spectacular fashion similar to the way it did in 1929.  His inaction proved to be the wiser course, and ironically accorded with a reference of Karl Marx's to "crackbrained meddling by the authorities" that can "aggravate an existing crisis."  But, success is ultimately measured by purpose.  According to journalist Walter Lippmann's contemporaneous accounts, the New Dealers would "rather not have recovery if the revival of private initiative means a resumption of private control in the management of corporate business... [T]he essence of the New Deal is the reduction of private corporate control by collective bargaining and labor legislation, on the one side, and by restrictive, competitive and deterrent government action on the other side."  Measured by its true purpose, rather than by economic recovery, the New Deal was a rousing success.  Many of the New Dealers advocated the same policies long before the Great Depression, which proved to be a convenient excuse for enacting their program rather than a cause of doing so.  "The New Deal succeeded in using a transient crisis to create enduring institutions, including among others the Federal National Mortgage Association or 'Fannie Mae,' which FDR created in 1938, and which has been at the heart of the housing boom and bust that led to today's financial crises."

Sowell sees the same dynamic at work in the Obama Administration, which within a month of taking office passed a thousand-page spending bill involving hundreds of billions of dollars in just two days, even though the bulk of the money wouldn't be released until just before the 2010 elections.  "If the purpose was to get the current economic crisis behind us, then the slow-moving policies passed in haste make no sense.  But if the purpose is to use the current crisis to create enduring changes in the institutions of the American economy and society, then the haste makes perfect sense... what matters is how fast the law gets passed, while the public is panicked, and before any opposition can get organized."  He cites then chief-of-staff, Rahm Emanuel, who said that "you never want a serious crisis to go to waste... it's an opportunity to do things you could not do before."  Americans may as well wake up to the fact that the crisis caused by big-government politicians was used by the same big-government politicians to fundamentally and enduringly change the institutions of American society. "To those who are eager for an expansion of government, the market has always failed." Yet, the notion that politicians will consider a crisis to have gone to waste unless used successfully for partisan purposes, while the people are too panicked to resist, should give them pause, if not raise red flags for them.

Sowell ends by concluding that "Despite differences of personalities and of the times, the underlying vision of the New Deal and that the current administration are fundamentally similar... What the government buys with the enormous sums of money it dispenses is the power to give orders to the recipients that the Constitution never authorized them to give.  Politicians are, in effect, buying up our freedom with our own tax money." Noman says that is a powerful money line, and thinks its a pity that it rings so true.   Adding insult to injury, the cause of our crisis--big government politicians tinkering with business decisions--successfully posed as its cure; the people and party most responsible for the mess were put in charge of cleaning it up.  And, that they have, throwing the baby out with the bathwater.

No comments:

Post a Comment