March 18, 2012 7:52 pm
America’s three takes on the crisis
Is capitalism in crisis? The question, posed earlier this year in a series of articles in the Financial Times, is suddenly commonplace. In the last week alone, this journalist has attended two august conferences entitled “capitalism in crisis”, one in New York, one in Washington. There is little consensus. But most agree that if capitalism is in crisis, it is localised: western capitalism is in trouble while communist China and its neighbours are free of philosophic angst.
For the time being, continental Europeans are filtering their woes through the prism of Europe, rather than the grander abstractions of capitalism. Only in the US, which for now is probably the least crisis-ridden portion of the western world (a scant consolation), is the question being addressed directly. Since the 2008 meltdown, America’s response has been divided into three schools, of which two are ascendant.
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The first, which virtually monopolises the Republican party and which we might label “purgative”, says Americans are being punished for Washington’s gluttony. Only when government stops taxing and over-regulating the wealth creators will animal spirits return. At its extreme end comes Ron Paul, the libertarian candidate for the Republican presidential nomination, who refuses to lie down, no matter how many times he comes last. His fortunes have tracked the price of gold, which is now 14 per cent below its peak in 2011.
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Its most effective exemplar is Grover Norquist, founder of Americans for Tax Reform, who has cajoled virtually every elected Republican to sign a pledge never to raise taxes. Under Mr Norquist’s “starve the beast” approach, even the abolition of tax breaks counts as a tax increase and must be matched by spending cuts. It is the philosophy of lemmings. It is now the controlling spirit of the Republicans.
The second, encompassing the Obama administration and the mainstream economics profession, we might label “restorative”. Their goal is to rekindle demand by means fiscal and monetary until the economy has reached the point where it needs no further help. They concede that there was much wrong with the model before the 2008 meltdown, including poor regulation and an unfair distribution of wealth. But they stop short of querying the foundations of US capitalism. They remain in the intellectual – if not always the electoral – ascendant.
In spite of signs that US unemployment is finally dropping, the restorationist war is by no means won. Grounded in the Keynesian lessons of the Great Depression, their greatest fear is that the US is approaching another 1937 – when Franklin Roosevelt plunged the US back into depression by switching to fiscal austerity. Their fears are well-founded. They are also right to say that US politics poses the greatest threat to America’s economic sanity. But they are too complacent about the underlying health of US capitalism.
That, at least, is the opinion of the third school, which we might describe as diffuse but which prefers to call itself “new foundation”. Its proponents include economists, such as Kenneth Rogoff and Nouriel Roubini, but also some business leaders and think tanks. Their view is that the US – and other developed economies – needs to renovate the building. American capitalism was already failing to cater to the majority before the 2008 crisis, they argue.
They have a lot of evidence on their side. Before the meltdown, median incomes had already dropped in the 2002-2007 business cycle, which was unique for a developed capitalist economy in the last three generations. Since then, things have got worse. According to the Bureau of Labor Statistics, US weekly median incomes have fallen by two per cent since the US recession officially ended in mid-2009. Incomes are supposed to rise in a recovery.
This time that holds true only for the crème de la crème. Earlier this month, Emanuel Saez and Thomas Piketty, the Berkeley economists, showed that the top one per cent of Americans captured 93 per cent of the growth in 2010. That was up from 65 per cent in 2001, the first year of the previous recovery. Meanwhile, real incomes did not budge for the remaining 99 per cent.
But evidence amounts to little in a democracy if the remedies look too radical. The new foundationists are right in pointing to structural flaws in the US economy. But their concerns have been gradually sidelined by the tussle between the first two schools, whose next showdown is rapidly looming.
Regardless of who wins the election, today’s incumbents face an ominous convergence of decisions in the November “lame duck” session of Congress. These include the expiry of the Bush-era tax cuts, the next approval to lift America’s sovereign borrowing ceiling, and the imposition of a $1,200bn automatic “sequester” on the budget if they fail to agree a fiscal plan. The outcome remains impossible to forecast. No one should put all their money on a benign scenario.
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In the same way that the urgent drives out the merely important, the Keynesian restorationists are thus blotting out the foundationists. The fear of an ill-timed fiscal purge later this year cannot be dismissed.
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All of which will one day come to be seen as a missed opportunity by America. The restorationists often remind us that Keynes once said, “in the long run we are all dead”. That is right. Except that the economic long run has long since been upon us.
Copyright The Financial Times Limited 2012.
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