Capitalism has long enjoyed exceptionally strong public support in the United States because America’s form of capitalism has long been distinct from those found elsewhere in the world — particularly because of its uniquely open and free market system. Capitalism calls not only for freedom of enterprise, but for rules and policies that allow for freedom of entry, that facilitate access to financial resources for newcomers, and that maintain a level playing field among competitors. The United States has generally come closest to this ideal combination — which is no small feat, since economic pressures and incentives do not naturally point to such a balance of policies. While everyone benefits from a free and competitive market, no one in particular makes huge profits from keeping the system competitive and the playing field level. True capitalism lacks a strong lobby.
That’s why it is such a shame that a government that should know better is so determined to ignore Stiglitz, Volker, and Johnson.
One of the key successes of the Democratic Party under Clinton was uniting the traditional populist base – the labor unions, minorities, the poor – with the rising intellectual capital class. Finance has been the especially lucrative ally, but over the past ten to twenty years we have seen a steady shift in all education-intensive professions. George Bush’s Know-Nothing approach, which reached its apotheosis with Sarah Palin’s American Idol-style campaign (why shouldn’t I be able to be VP, just because I happen not to know the first thing about any political issue – I’m just as good a person as anyone else) managed to drive away pretty much anyone who can drop things at work without danger of breaking a foot.
To some extent it is an unnatural alliance. Thomas Frank’s What’s the Matter with Kansas argued that the Republican Party is vulnerable in pursuing an economic policy that favors the rich while relying on the votes of the poor. Perhaps, except the last fiscally conservative Republican was Nelson Rockefeller; Republicanism in modern America is a tribal assertion, a social movement founded on God, guns, gays, and a profound selfishness.
The Democrats, on the other hand, have to reconcile two different worldviews. To oversimplify a bit, the Democrats are torn between identifying with the guy foreclosing on the house and the guy whose house is being foreclosed.
The traditional Democratic base would like enlarged social programs, higher taxes, some form of debt repudiation. The software engineers, the accountants and lawyers who are recent converts to the party, don’t want anything of the sort. Zingales finds the pressure point:
If the free-market system is politically fragile, its most fragile component is precisely the financial industry. It is so fragile because it relies entirely on the sanctity of contracts and the rule of law, and that sanctity cannot be preserved without broad popular support. When people are angry to the point of threatening the lives of bankers; when the majority of Americans are demanding government intervention not only to regulate the financial industry but to control the way companies are run; when voters lose confidence in the economic system because they perceive it as fundamentally corrupt — then the sanctity of private property becomes threatened as well. And when property rights are not protected, the survival of an effective financial sector, and with it a thriving economy, is in doubt.
Faced with this challenge, the Obama Administration made the politically expedient compromise: stop being pro-market and start being pro-business. That is, stop supporting the process – which feels scary and impersonal and sends depressing 401(k) statements and foreclosure notices – and get into the business of picking winners. The government decided to protect the banks (and decided who should live and with how much gain), decided to funnel money to its friends through the various incarnations of PPIP, intervened to protect its union allies, and generally chased the news cycle.
The problem with having no principles is that it is terribly difficult for anyone else to know what you will do, and impossible for anyone to expect your system to outlive you.
At the beginning of the 20th century, when modern American capitalism was taking shape, U.S. government spending was only 6.8% of gross domestic product. After World War II, when modern capitalism really took shape in Western European countries, government spending in those countries was, on average, 30% of GDP…When the government is small and relatively weak, the way to make money is to start a successful private-sector business. But the larger the size and scope of government spending, the easier it is to make money by diverting public resources. Starting a business is difficult and involves a lot of risk — but getting a government favor or contract is easier, and a much safer bet. And so in nations with large and powerful governments, the state tends to find itself at the heart of the economic system, even if that system is relatively capitalist.
The challenge for the Obama team is how to get out of the death spiral. The more the government digs its tentacles into the economy, the more important it is that there be transparency and equity, but this goes against one of government’s iron desires: the desire to award favors. The opportunity is there – general public frustration is such that any decisive action, while undoubtedly opposed by Gretchen Carlson and the rest of the incoherent Fox crew, would be welcomed.
The failure of AIG, Goldman Sachs, and money market funds everywhere would have been a harrowing experience. Even the good-bank bad-bank split of Citigroup would have made for a rough period of transition. Soon enough, however, we would have come through it, the better for the lessons if not the experience.
The enemy that can really damage our economy is not a sudden shock to the ownership structure – remember, bankruptcy or receivership are simply rearrangements of claims – but the slow rot of cronyism. It would be a shame if we traded a quick goosing of the S&P for a generation of subtle corruption.
[T]he data yield scant evidence that social mobility is higher across the board in the United States than in other developed countries. But while this difference does not show up in the aggregate statistics, it is powerfully present at the top of the distribution…the wealthiest self-made American billionaires — from Bill Gates and Michael Dell to Warren Buffett and Mark Zuckerberg — have made their fortunes in competitive businesses, with little or no government interference or help.
The same cannot be said for most other countries, where the wealthiest people tend to accumulate their fortunes in regulated businesses in which government connections are crucial to success. Think about the oligarchs in Russia, Silvio Berlusconi in Italy, Carlos Slim in Mexico, and even the biggest tycoons in Hong Kong. They made their fortunes in businesses that are highly dependent on governmental concessions: energy, real estate, telecommunications, mining. Success in these businesses often depends more on having the right connections than on having initiative and enterprise. In most of the world, the best way to make money is not to come up with brilliant ideas and work hard at implementing them, but to cultivate a government connection.