Don’t get me wrong: this won’t be a post that encourages socialism.
I think, though, as our government faces snarling accusations of socialist behavior, we should be able to evaluate this in the cold light of day, without the emotional baggage. So let’s get a few things clear:
- The United States of America is not founded, fundamentally, as a capitalist country, or as a country that opposes socialism (socialism = governmental, as opposed to private, ownership of the engines of capital production). Capitalism and socialism are economic systems, not political systems. The framers of the constitution clearly believed in the sanctity of private property, but it would be a tremendous leap to conclude thereby that they proposed a capitalist economic system. A capitalist system requires several conditions on which the constitution is totally silent, such as: (a) a commitment to the desirability of economic growth; (b) governmental sanction of private enterprise as the engine of growth; (c) recognition of the market as the prime determinant of economic value; and (d) legal and institutional means of turning credit into money.
- The U.S. is a democratic country. If, for reasons unknown, a clear majority of our citizens and a clear majority of our legislators preferred socialism as an economic structure, we could become an entirely socialist country, with no particular harm being done thereby to our constitution.
- Government intervention into economic matters is excessively common — the Federal Reserve Bank is nothing but government intervention, after all –, and even government ownership of certain industries is not even close to being without precedent. Our system has not infrequently (and usually it’s in crisis) become a hybrid capitalist/socialist system.
- Many of our best capitalist friends have hybrid systems. Socialized medicine, for example (which is demonized in this country largely because of its namesake — the devil “socialism”), is practiced very successfully in Canada, Australia, Japan, Norway, Sweden, Switzerland, the United Kingdom… the list is loooong, and every one of those countries ranks ahead of the United States (which is a lowly 37th, behind Costa Rica and just ahead of Slovenia) in the World Health Organization’s ranking of the effectiveness of healthcare systems. Put another way: we pay in the U.S. almost 50% more for healthcare than any other country in the world… and get the 37th-best care. In fact, really the only other major country that does not have universal healthcare (meaning: socialized medicine) is Mexico. So, you know, umm… sometimes this stuff works.
So maybe we can set aside all of the shock and worry and emotion and just evaluate, without rancor or hysterics, the merits and costs of socializing industries, as we seem to be doing (either by propping them up unnaturally, or by outright taking ownership).
And it weighs like this: aside from the socialization of medicine, which clearly works (perhaps because medicine is naturally a service, like police and firemen, and not an industry, like software and farming), socialism has proven itself to be a truly lousy idea. Don’t hate it because it’s anti-capitalist; hate it because it doesn’t work. Socialist economic systems are so deeply flawed and so foolish that they have all but disappeared off the face of the earth, and with good reason.
So we are left to wonder: how can we energize the economy, without first caving it in entirely?
To get at an answer, let’s look at what is fundamentally flawed in what we’ve been doing: The economic issue has been precipitated by a massive credit problem: Banks have been saddled with increasingly lousy assets (“lousy assets” = “loans that are unlikely to be paid back”), primarily due to huge risks taken in mortgages. Banks are now simply not loaning anyone any money. So a business that has historically needed the occasional line of credit to help it through when its creditors are slow to pay, for example, can suddenly find itself unable to get any money to muddle through a rough patch. It can’t pay its workers, who now don’t buy stuff at the grocery store… etc. A vicious cycle.
In response, we have already upset the capitalist applecart by removing the most fundamental risk/reward equation from our economy. You see, businesses have two owners, really: those who hold the shares of the company (equity holders), and those to whom the business owes money (debt holders). The equity holders only “own” the company when the debt holders are paid, on time and in full.
Equity holders own the upside of the business, but only after debt holders are satisfied. That is the yin and yang of capitalism: as an equity holder, you get your piece of the pie, which can be unconscionably large, but only if the business becomes more valuable than the debt it holds. Otherwise, you get nothing at all.
It’s super-simple, and it’s the capitalist way: when Kmart and Worldcom became imperiled, the debtholders took all the value of those businesses, and the equity holders were wiped out. If you take that fundamental equation away, you encourage undue risk in a business, since there is really no disincentive to bad behavior. This is what we saw with Fannie Mae and Freddie Mac, after all: believing that the government would “bail them out” in the end, they took on ever-more-risky assets, since there was no real penalty if they lost at that game. Heads I win, tails you lose.
The “bailout” of the auto industry is precisely of this ilk: they made crummy cars, so nobody bought them. And now they want billions of dollars to continue making crummy cars. We pay the price for their terrible management.
Okay, that’s been the problem. Now on to solutions:
Solution One: Temporary “Socialization” of Banks.
People are talking as though having the government “take over” certain banks is un-American, as it is “socialist” (see above for my feelings on that). I would argue that it is not really that at all — in fact, it is a return to fundamental capitalist principles.
Banks are a different sort of a business than most. Because they are by nature highly leveraged, they are extremely risky. And because they are both necessary and risky, the government has a hand in banking, in order to prevent runs and build trust.
The relationship of government and banks could be summarized as follows: the government insures certain investors — depositors and holders of CD’s –, who are debt-holders, against losses (to provide that trust and stability we just talked about). So they are essentially backing the debt-holders. In exchange, the government retains the right to take control of a bank if it becomes imperiled.
What this should mean to you is this: when the government takes control of a bank through receivership, it is not engaging in a “socialization” measure. It is simply doing what it is contractually allowed (in reality, sort of obligated) to do, in a normal capitalist I-hold-the-debt-so-I-own-you-if-you-are-sucking kind of contract.
So I view this as option one: Have the government do what a capitalist is supposed to do, when a company in which he holds debt is imperiled: go get your assets back.
Amazingly, even Alan Greenspan now supports this position, saying that “it may be necessary to temporarily nationalize some banks in order to facilitate a swift and orderly restructuring.” Paul Krugman, the Nobel Prize-winning economist, says that it’s “amazing how compelling the logic of temporary nationalization is.”
This should probably take the form of the government taking control of the boards of those companies, replacing their CEO’s and encouraging swift action to write down losses and restructure bad loans, in order to free the bank’s balance sheets and allow for the release of undue restrictions on credit.
Option Two: Create New Banks
Some economists are posing a very intriguing question: If you’re going to spend billions to restructure the balance sheets of banks so that they can make loans… why wouldn’t you just start over?
Instead of patching up banks that made poor decisions, why not create new banks instead, who could start making loans immediately (since their own balance sheets would be pristine)? Old banks with lousy assets would either figure out how to start making loans (to compete), or they’d be forced to put their assets on the market, or both. The assets would be put up on the free market, where these new banks could snap them up at an appropriate market-based price.
Now, isn’t that the most beguiling little capitalist idea?
Option Three: Invest in the Right Things
This is not really an “option” like the others, in that it’s certainly not exclusive of other actions. You can do what you want with banks, and also do this.
I don’t really have an issue with the government making infrastructure investments. But I want them to make the right infrastructure investments.
A road is nice and all that, but it stops its job-creation magic on the day that the road is complete. A hospital or a school, placed correctly, keeps on giving long after the federal funds are gone.
The Synthesis blog notes that, in investing to help Japan out of its “lost decade,” the government observed the following: an investment in physical infrastructure (such as roads) produced 137% growth in GDP (or a 37% ROI due to the temporary nature of the jobs and decreased travel time). Meanwhile, for social services and elderly pension payments, they saw a 164% growth in GDP, and for education investments the impact was 174% growth.
This is undoubtedly in part due to the fact that job losses tend to be regressive (i.e., people with less education lose their jobs at a much higher rate than those with more education). The threat of losing one’s job, after all, has a profoundly depressive effect on consumption and therefore on the overall economy. When a well-educated population feels secure in their jobs, they buy things and the economy is stimulated. The wheels of commerce turn.
Moreover, the effect of making these correct infrastructure investments spans generations: an educated man tends to marry an educated woman, and they raise educated kids, who keep the wheels turning.
So my thoughts for the day are: (a) stop being so scared of a little misnamed socialism. The Red Menace is long gone. And anyway the nationalization of banks isn’t really socialist. (b) How about being really capitalist? And, (c) let’s make good stimulus decisions.
Just food for thought.
