As I got to know the free-market, supply-side crowd, the hard money, low-tax, Wall Street Journal deregulate-and-privatize team, I came rather to like them. I never thought they were right. Far from it: on matters of economic policy they were in my view mostly nuts. But I did think - and do think - that they held their views in good faith. They were, by and large, willing to argue the merits of their ideas. And they had behind them the authority of a vast academic establishment, ranging from Friedrich von Hayek to Milton Friedman to such contemporaries as Gary Becker and Robert Mundell - all just as nutty in my view. (For those who would be amused by it, my 1990 debate with Friedman on his TV show, "Free to Choose" can be found here. )
The academic economics of the 1970s lined up behind the right-wing politics of the 1980s for a reason. Reaganomics had a logic. Each policy would aim at one problem. Tight money would cure inflation. Low taxes would stimulate saving and work effort. Small government and balanced budgets would 'crowd in' investment; free trade would make us efficient. Corporate executive pay should be tied to the stock market, as this would cure the "agency" problem and make the firm work for its owners; "market discipline" would instill a new competitiveness in the enterprise. Deregulation, above all, would substitute the invisible hand of the "efficient market" for the dead hand of bureaucracy.
This was a modern version of the economics of David Ricardo, of which Keynes wrote long ago:That it reached conclusions quite different from what the ordinary uninstructed person would expect, added, I suppose, to its intellectual prestige. That its teaching, translated into practice, was austere and often unpalatable, lent it virtue. That it was adapted to carry a vast and consistent logical superstructure, gave it beauty. That it could explain much social injustice and apparent cruelty as an inevitable incident in the scheme of progress, and the attempt to change such things as likely... to do more harm than good, commended it to authority.It was very interesting to me that some of the first to sense this loss of public purpose were the very conservatives who had swept in with Reagan. The nemeses of my youth, people like Bruce Bartlett, Paul Craig Roberts, the late Jude Wanniski, went over into hard opposition. This was compounded by their opposition to Bush's assaults on civil liberties and the war in Iraq, but at the core they felt that Bush had no conservative convictions. And so, at least as far as broad politics go, we were suddenly on the same side. As I put in on Marketplace on Thursday: "Had I gone crazy? Or had they gone sane?" Either way, there seemed to be a book in it and The Predator State is the result.
Reality soon barged in. Following the steep recession of 1981-82 and the victory of the congressional Democrats that year, economic policy became much more pragmatic. Monetarism was abandoned. Social Security was not privatized. The income tax cuts kicked in, and while they never stimulated saving or work effort, they did increase purchasing power in the usual Keynesian way. Later on, Congress took back quite a lot of the initial Reagan tax giveaways, and enacted a comprehensive tax reform. Reagan's trade policies were quite protectionist- notably on cars and steel -drawing stern protests from libertarians. And after the fiasco of the savings and loans, that industry was re-regulated while many perpetrators of financial fraud went to jail.
Still, though the free-marketeers lost many battles, their propaganda machine remained very strong. And historians have so far largely accepted their story. Global events helped: the fall of communism in Europe reinforced Milton Friedman's argument that capitalism meant freedom (something that many Chileans and Argentines in those years found hard to swallow).
But liberals and Democrats also abetted the triumph of the right. They mostly stopped arguing over theory. "The age of big government is over!" Bill Clinton declared. Liberals accepted the virtue of balanced budgets, of low tax rates, and of deregulation in many spheres, of leaving the fight against inflation solely in the hands of the Federal Reserve. In alliance with big business, Democratic presidents became aggressive advocates of what they called "free trade" - though it was really just the use of diplomacy for political payola. Democrats and liberals won some policy battles and some elections, and they presided over a prosperous moment. But they did it by selling themselves as Reagan-lite, by overselling small social advances, pilot projects and placebos, and by riding the crest of a credit boom that could not be sustained.
The judicial coup of December 2000 that installed Bush and Cheney brought back some of Reagan's men and his most extreme policies - tax cuts for the wealthy, big increases in military spending, aggressive deregulation. But it didn't bring back the ideas. Instead, it became clear that Bush and Cheney had no real ideas, no larger public justification. They cut taxes to enrich their supporters. For the same reason, they outsourced to Blackwater and Halliburton and pursued military pipe dreams like Missile Defense. They were willing to have the government spend like a drunken sailor in 2003/4 to boost the economy before the election. They placed lobbyists in charge of the regulators, representing, in every case, the most extreme anti-regulation perspective. (Not so long ago, Bush's financial regulators showed up at a press conference with a chainsaw.) Under Bush and Cheney, oil and gas, drug companies and defense contractors, insurers and usurers control the government of the United States, and it does what they want. This is the predator state.
The blurb that accompanies the Barnes & Noble offering says
The real economy is not a free-market economy. It is a complex combination of private and public institutions, including Social Security, Medicare and Medicaid, higher education, the housing finance system, and a vast federal research establishment. The real problems and challenges -- inequality, climate change, the infrastructure deficit, the subprime crisis, and the future of the dollar -- are problems that cannot be solved by incantations about the market. They will be solved only with planning, with standards and other policies that transcend and even transform markets.As a student of economics and of accounting, I very much agree with this statement. Government is critical to the effective operation of an economy.
[Highlighting added by Editor]
But at the same time, the only semi-reliable measure of value is what is developed in a fair market between an independent and equally powerful buyer and seller. Markets are critical to setting value in the economy, although real markets are quite rare. But markets only record the current value. They do not have any predictive power beyond the best guess of the buyers and sellers. Markets reflect what the buyers and sellers can agree is fair value right now. Plans, economic infrastructure, research in progress, financial and governmental institutions and long term developments are not accounted for in markets except on a historical basis.
Here's more from Jay K. Galbraith:
I have never accepted that the United States fits the mold of a "free market economy." If we ever did, that model collapsed in the Great Depression. What was built in its place was a remarkable mix of public and private. There was, of course, plenty of room for enterprise. But it came in a framework, of a government that was, at its best, competently concerned with research, infrastructure, national security, the workplace and the environment, that provided Social Security and a large share of education, health care and housing. Part of the accidental genius of the system was that the public-private mix in those three areas, especially, created "soft budget constraints" that caused higher education, the medical sector and the mortgage market to grow very large - far larger than they ever could have, under either the free market taken alone or under socialism. While many notorious problems remained (especially our lack of universal health insurance), this enriched the middle class and was an immense source of growth.Galbraith also explains what is going to be needed to survive the current set of crises that the Bush administration and the conservative movement have created. Suffice to say that it does not involve shrinking government, cutting taxes, or "starving the beast and drowning it in a bathtub." Neither the conservative nostrums nor the strange acquiescence by Clinton and Blue Dog Democrats will help America survive the increasingly disastrous economic problems the Reagan Revolution, conservative movement, and Bush administration have left us to suffer through.
The Bush-Cheney years should have taught us that today's right wing understands this very well. They are not interested (if they ever were) in reducing government. On the contrary, they are perfectly willing to expand it. But the goal, in every case, is to expand government in such a way as to benefit, first and foremost, political friends and supporters at the expense, mainly, of the middle class. And while a rich country can survive a fair amount of this, it cannot withstand the complete control of government by predators. For what happens then, is a population crash of the prey. This, as a result of the sub-prime mortgage crisis and the systematic deregulation of securities and futures markets, we now confront in the financial crisis and the speculative commodities bubble. And if we do not reclaim and rebuild the capacity of our government to act, with purpose and on a large scale, we will eventually see far worse as the climate crisis unfolds.
The Predator State looks like it will be a very important book for government, politics and the economy in the near future.