Categories
Political Philosophy

State Capitalism and Government (In)Efficiency

Ian Bremmer’s most recent article in Foreign Affairs on state capitalism was rather interesting and analytical regarding the role of the government in an economy – until this sentence cropped up:

Deeper state intervention in an economy means that bureaucratic waste, inefficiency, and corruption are more likely to hold back growth.

Bremmer articles has gotten more than the usual amount of attention – George Will for example made it the basis for a column. Will rejects one of Bremmer’s basic premises though – that in the developed world, the recent forays into state capitalism are temporary:

[Bremmer] probably is wrong because he underestimates the pleasure politicians derive from using their nation’s wealth as a slush fund for purchasing political advantage.

Will implicitly accepts Bremmer’s above point here – pointing to a reason why government is less efficient than the market – because politics begins to affect it and detract from the bottom line.

Last night, I was at a discussion hosted by the Council on Foreign Relations with Bremmer and Felix Rohatyn on “the state’s growing influence on liberal market economics” – and this question came up a few times. Several people commented on this – and the questioned what I took to be the conventional wisdom on this subject. One, a banker or economist of some sort who assisted Eastern European countries by aiding their government entities (such as phone companies, etc.) transition from a Communist to a capitalist economy. He made it clear from his experience that these government entities were inefficient and wasteful. Rohatyn though made the point that this occurred in a closed, non-transparent economy – and these factors contributed to waste more than government involvement. Rohatyn also made the point – which had Bremmer nodding – that as we could see thanks to our insights into GM and the financial companies – that they seemed rather wasteful and inefficient as well. Rohatyn seemed to think efficiency was only possible if the right person was leading an organization – whether it be GM or the DMV. But I think it may be more a matter of transparency and competition. These are the essence of a free market – which for me should not be defined as the absence of the state from a market, but the presence of choice, of transparency, of competition. The state can engage in practices which destroy or undermine a free market – subsidizing certain companies and declaring monopolies by the state for example. The state must be mindful of how it affects the market if it chooses to compete with private companies.

All of this would be moot though if government is less efficient than private companies. But I wonder – and this is a question – if there is any proof that government is more inefficient than the private market. I mean – I can tell you from my own experience that government can be inefficient. But I can also tell you that private companies also can. In terms of health care, at least some studies have found that Medicare is more efficient at providing health care than private insurers – as they eliminate the first step of illegally rejecting all payments on claims as a matter of course.

Of course – the many examples of government efficiency are legendary – but wasn’t it one of our bastions of capitalism that spent millions on his own personal bathroom. Of course, waste is less galling if it isn’t done with our own money. But I’m hoping someone out there has a study proving this – or disproving it.

It seems to be one of those ideas that are just accepted – conventional wisdom.

Categories
Economics Financial Crisis Foreign Policy Pakistan Politics

How Pakistan Is Like AIG

[digg-reddit-me]nex·us n.pl. nexus or -us·es.

  1. A means of connection; a link or tie: “this nexus between New York’s . . . real-estate investors and its . . . politicians” (Wall Street Journal).
  2. A connected series or group.
  3. The core or center: “The real nexus of the money culture [was] Wall Street” (Bill Barol).

[Latin, from past participle of nectere, to bind.]

This Sunday, America witnessed Pakistani President Zardari’s disgraceful performance on Meet the Press. He pandered; he obfuscated; he shirked any responsibility or blame; he turned briefly eloquent – and then outrageously self-righteous. It was clear that he is not one tenth the politician his wife was – and it seems not one tenth the leader. She may have been corrupt (as it seems was he) – but he appears to lack her communicative gifts or her aptitude for politics. On top of it, his management style seems be Bush-level incompetence. The most ridiculous point Zardari tried was to invoke AIG’s bailout as an argument to give more money to Pakistan.

David Gregory – to his credit – asks the tough question – the question that needs to be asked of Pakistan’s leader (especially given stories like this) although Gregory does manage to shift responsibility for the criticism of Zardari off to another reporter:

The question a lot of people ask is are you – is Pakistan really committed to that war?  In The New York Times Dexter Filkins, who, who’s reported from Afghanistan and Pakistan, writes this:  “Whose side is Pakistan really on?  …  Little in Pakistan is what it appears.  For years, the survival of Pakistan’s military and civilian leaders has depended on a double game:  assuring the United States that they were vigorously repressing Islamic militants–and in some cases actually doing so–while simultaneously tolerating and assisting the same militants.  From the anti-Soviet fighters of the 1980s and the Taliban of the 1990s to the homegrown militants of today, Pakistan’s leaders have been both public enemies and private friends.  When the game works, it reaps great rewards:  billions in aid to boost the Pakistani economy and military and Islamist proxies to extend the government’s reach into Afghanistan and India.”

Zardari’s responded:

[W]hat billions are you talking about?  Like I said, a billion dollar a year?  That’s not even – altogether, this aid package is not even one tenth of what you gave AIG.  So let’s face it; we need, in fact, much more help.

This isn’t the first time Zardari has found it prudent to invoke AIG to justify giving more billions to Pakistan – he apparently disconcerted lawmakers a few days earlier this week – as the New York Times reported:

[W]hen he asked for financial assistance, he likened it to the government’s bailout of the troubled insurance giant, American International Group.

While it is probably true that Zardari needs more funds – his pique at being asked to justify these funds is galling – especially when so much of it was apparently spent preparing Pakistan’s military to fight India instead of the Taliban. Though this analogy is politically stupid – it does bring up an interesting parallel.

AIG has been the nexus of the financial crisis in much the same way that Pakistan is the center of the threat of strategic terrorism. 

When synthetic CDOs were invented, they were structured in such a way as to create positions that were safer than AAA-rated debt. (An explanation of what this means here.) These positions were called super-senior. Yet the ever “cautious” bankers decided to hedge against even these supposedly risk-free positions – allowing them to free up more capital, so that for the purposes of regulation, it was treated as if they had not lent out any money at all. They decided to buy insurance, calling this insurance a credit default swap, hedging against the risk that even this super-safe investment would go bad. There was one big player in this, one firm that provided so much of this insurance which led to this boom in lending and enormous leveraged positions – AIG – who insured these super-safe debts with nary a plan to deal with defaults. After all – these debts were super-senior – there would only be defaults if historically unprecedented numbers of these mortgages went south. (Precedent only went back forty years or so with modern macroeconomic record-keeping.) AIG Financial – a small part of the AIG empire which spanned insurance across dozens of industries around the world – decided to leverage the entire company to insure these products – leading to enormous profits in the short-term – and systematic risk as soon as things went bad. If AIG had not been able to pay on its insurance to the big banks, things would likely have been worse.

Pakistan meanwhile is the land of Dick Cheney’s nightmares, where WMDs, nuclear weapons, terrorists, and a teetering state all exist. Pakistan combines all of the elements national security experts fear could have disasterous consequences if they come together. As Barton Gellman describes Pakistan’s importance in his excellent biography of Dick Cheney:

The nexus, if it was anywhere, was in Pakistan – a nuclear state whose national hero sold parts to the highest bidder, whose intelligence service backed the Taliban, and whose North-West Frontier Province became a refugre for al Qaeda.

What it comes down to is that both are too big – and too connected – to fail. Both have had billions of American dollars pumped into them to prop them up. Both have prompted outrage as they have seemed to use this money to benefit themselves and not for the purposes it was intended. Both are controlled by leaders whose hands were far from clean in creating the current crisis. Neither the leadership of Pakistan nor the leadership of AIG have taken responsibility for the crisis that occurred oin their watch – in their realm of control – blaming America and the world at large for their problems instead.  Perhaps because of this, the leadership of both seem to believe that they deserve to be rewarded for their efforts rather than held accountable for their significant failures. Yet even so, the costs of the failure of either is likely catastrophic.

Maybe this is the point Zardari was trying to make – his way of taunting us with the fact that he knows we cannot allow him to fail – just like AIG.

[Image by cogito ergo imago licensed under Creative Commons.]

Categories
Barack Obama Criticism National Security Politics The Opinionsphere The War on Terrorism Videos

Fox News uses Nazi propaganda to defend torture, attack Obama

[digg-reddit-me]As a preview to this Keith Olberman video, here’s quick review of the background on this: Andrew Sullivan wrote a post comparing the adopted hero of the right-wing, Winston Churchill, and current creature of the right-wing, Dick Cheney – specifically on the issue of torture. Sullivan explained that Churchill refused to torture German prisoners even with Britain being bombed daily by the Germans. He cited one of Britain’s chief interrogators during World War II on torture:

[He] did not eschew torture out of mercy. This was no squishy liberal: the eye was made of tin, and the rest of him out of tungsten. (Indeed, he was disappointed that only 16 spies were executed during the war.) His motives were strictly practical. “Never strike a man. It is unintelligent, for the spy will give an answer to please, an answer to escape punishment. And having given a false answer, all else depends upon the false premise.”…

Barack Obama then cited Churchill’s refusal to torture during a press conference – and aides later confirmed he reads Andrew Sullivan’s blog and had come across this information shortly before he brought it up at the press conference.

Immediately, the right-wing press began to try to reclaim Churchill as their hero re-branding him as a torturer and war criminal.

Take it away, Keith

Categories
Barack Obama Economics Financial Crisis

Theories of the Financial Crisis: Animal Spirits

[digg-reddit-me]David Brooks is a reliable barometer of the opinions and beliefs of the Washington establishment (and I don’t mean that as an insult.) The figure he cuts is a rather odd combination of an amateur (but insightful) anthropologist and a insider protecting the system. All of this makes it significant to note that David Brooks has on several occasions stated that the root of this financial crisis is a “loss of confidence.” He has stated this in several of his columns, including his one immediately following the September 15 freefall:

At its base, the turmoil wracking the world financial markets is a crisis of confidence.

Many of Geithner’s critics have said that he is treating the financial crisis primarily as a liquidity crisis – which is defined as “a ‘general feeling of mistrust in the banking system’ conducting to a temporary disappearance of credit.” This is a common form that a crisis of confidence in the financial system takes.  

The Congressional Oversight Panel in their report [pdf] written to evaluate the TARP bailouts, for example, described what they saw as one of Geithner’s asusmptions :

One key assumption that underlies Treasury’s approach is its belief that the system-wide deleveraging resulting from the decline in asset values, leading to an accompanying drop in net wealth across the country, is in large part the product of temporary liquidity constraints resulting from nonfunctioning markets for troubled assets. The debate turns on whether current prices, particularly for mortgage-related assets, reflect fundamental values or whether prices are artificially depressed by a liquidity discount due to frozen markets – or some combination of the two.

Paul Krugman has also often made this point – stating that Geithner seems to be acting as if we were in a liquidity crisis – in which the loss of confidence is the cause of the problem – instead of a solvency crisis – in which the loss of confidence is a symptom of the problem. 

Geithner, for his part, rejects this assertion that he is treating the problem as a liquidity crisis. When asked, he said it was, as all financial crises are, a combination of the two.

If this is primarily a crisis of confidence, there have been a number of historic examples of how these were contained. For example, this is a description of the resolution of the Panic of 1907 – in which J. P. Morgan’s timely intervention demonstrated how this could be done:

Shipments of gold were on the way from London to New York, and confidence had returned to the French Bourse, “owing,” reported one paper, “to the belief that the strong men in American finance would succeed in their efforts to check the spirit of the panic.” During a panic, confidence is almost as good as gold.

As politicans saw how these crises could be contained – and as they realized Morgan who had successfully beaten back several of these panics was getting near his end – they created the Federal Reserve to officially take on the role Morgan had been unofficially occupying, the lender of last resort and de facto regulator. 

As panics are short, they generally do not affect the fundamentals of the economy – but in a liquidity crisis such as this, restoring confidence is a more delicate task. It involves restoring what John Maynard Keynes referred to as “animal spirits” – those positive energies that cause people to be trusting and optimistic that are essential to a thriving economy. As Keynes wrote in his seminal work, The General Theory of Employment, Interest, and Money:

Even apart from the instability due to speculation, there is the instability due to the characteristic of human nature that a large proportion of our positive activities depend on spontaneous optimism rather than mathematical expectations, whether moral or hedonistic or economic. Most, probably, of our decisions to do something positive, the full consequences of which will be drawn out over many days to come, can only be taken as the result of animal spirits – a spontaneous urge to action rather than inaction, and not as the outcome of a weighted average of quantitative benefits multiplied by quantitative probabilities. [my emphasis]

This idea of animal spirits has created an opening for what appears to be Obama’s favorite branch of economics – behavioral economics. While economics generally treats human beings as homo economics, rational, self-interested (indeed, selfish), individuals who act entirely to serve their best interest (and who know what their best interest is) – behavioral economics takes a more scientific view of human beings. They try to understand human behavior through testing and real-life examples rather than through theoretical models. Some of Obama’s top advsiors from Cass Sunstein to Austan Goolsbee are known to be proponents of behavioral economics. And a recent article by Chrystia Freeland in the Financial Times, suggests that Obama’s administration may be using behavioral economics to solve this crisis, describing how “emotions might yet save the economy“:

Judging by the upbeat economic message we have been hearing from the White House, the Treasury and even the Federal Reserve over the past six weeks, that is a shrewd guess. The authors argue that “we will never really understand important economic events unless we confront the fact that their causes are largely mental in nature”. Our “ideas and feelings” about the economy are not purely a rational reaction to data and experience; they themselves are an important driver of economic growth – and decline.

I don’t have the expertise to judge if this crisis is one of solvency or confidence or whatever else it may be. But at this point there is a feeling – almost of a wind at the back of the economy. (I certainly hope this is the case.) It does seem to me that the lack of confidence is a major cause (rather than merely a symptom) of this crisis; and Obama’s gradualist approach, with every move telegraphed and thus predictable – seems to be generating confidence.

Categories
Humor Videos

Simultaneously Horrified and Fascinated

[digg-reddit-me]A small step away from the blog’s usual fare, here’s a clip from a high school play:

“I’m simultaneously horrified and fascinated.”

That about summarizes my feelings about Hamlet 2 as well – and this number, “Rock Me Sexy Jesus.”

Categories
Financial Crisis Humor National Security Pakistan Politics The Bush Legacy The Opinionsphere The War on Terrorism

Must-Reads of the Week

1. Inhuman. Andrew Sullivan, who has been one of the most insightful commenators on torture, discusses the term “inhuman”:

It’s odd, isn’t it, that we use this word to describe abuse and torture of prisoners. The reason it’s odd is that I’m not sure any animals torture. Yes, they can kill and maim and inflict dreadful suffering in the process of killing, eating or fighting. But the act of intentionally exploiting suffering, of lingering over some other being’s pain – using it as a means to an end – is not an animal instinct, unless I’m mistaken.

And so torture is in fact extremely human; it represents in many ways humankind’s unique capacity for cruelty.

2. 30 Rock. Jonah Weiner discusses 30 Rock’s odd conservative streak at Slate. The explanations he posits for this conservatism are perhaps beside the point, but interesting nonetheless:

Of course, 30 Rock was conceived during the reign of George W. Bush, which might help explain its ideological complexity. The show has been consistently critical of Bush, but perhaps 30 Rock began as a way to explore—and mine for gallows humor—the crisis of identity many liberals began to feel in his second term, when the Karl Rove playbook had seemingly replaced the laws of physics, when the “reality-based community” (including Liz Lemon’s Upper West Side) felt like an island populated by the marginal, flip-flopping, arugula-munching few.

3. Animal Spirits. Chrystia Freeland writes for the Financial Times that the Obama team seems to have accepted the premise of a recent book by behavioral economists about economic crises:

Judging by the upbeat economic message we have been hearing from the White House, the Treasury and even the Federal Reserve over the past six weeks, that is a shrewd guess. The authors argue that “we will never really understand important economic events unless we confront the fact that their causes are largely mental in nature”. Our “ideas and feelings” about the economy are not purely a rational reaction to data and experience; they themselves are an important driver of economic growth – and decline.

4. A Taliban Strategist Speaks. To The New York Times. Perhaps the most interesting article I have read about the Taliban’s plans in the Af-Pak region – though I have to wonder why this man would be speaking to a Western newspaper about the Taliban’s strategy. That said, you can judge the article for yourself. I pass it on as it seemed plausible to me:

One Pakistani logistics tactician for the Taliban, a 28-year-old from the country’s tribal areas, in interviews with The New York Times, described a Taliban strategy that relied on free movement over the border and in and around Pakistan, ready recruitment of Pakistani men and sustained cooperation of sympathetic Afghan villagers.

His account provided a keyhole view of the opponent the Americans and their NATO allies are up against, as well as the workings and ambitions of the Taliban as they prepared to meet the influx of American troops.

It also illustrated how the Pakistani Taliban, an umbrella group of many brands of jihadist fighters backed by Al Qaeda, are spearheading wars on both sides of the border in what for them is a seamless conflict.

5. Fool’s Gold. This one is actually a must-listen podcast of a talk given at the London School of Economics. Gillian Tett is a journalist for the Financial Times who recently wrote a book about the financial crisis and what led to it from her view as someone with a background in anthropology reporting who was reporting on derivratives before it was an exciting beat.

Bonus: Polar Insanity. Tim Wu writes in Slate about the perplexing desire of so many people – including himself –  to make the expensive trips to the polar regions:

Every so often, an iceberg floats by that is grander and more beautiful than any cathedral, though it lacks any history or even a name. What’s almost as shocking as its appearance is its anonymity: beauty untainted by fame. Most of these perfect objects will never be seen by human eyes. They float around and slowly melt by themselves, unappreciated and utterly indifferent to that fact.

Unnamed, plentiful beauty feels unearthly and almost decadent, like Sinbad the Sailor’s cave. It is alien to the typical human experience of finding everything we really desire to be scarce, expensive, or behind some temple curtain. It has always struck me that no one bothers to build museums in places of extreme natural beauty, and in Antarctica the effect is magnified. If an iceberg the size of Manhattan showed up outside town one day, why would you bother going to an art exhibit?

Categories
Political Philosophy Politics Reflections

Understanding Reactionaries

[digg-reddit-me]I tend to judge an individual’s politics on two levels. First, on a more traditional left to right spectrum (leftist to progressive to liberal to conservative to right-wing.) This left to right perspective can be further broken down – but in general, whether due to social, political, or psychological reasons, individuals in a political system can be described as belonging to a discrete place on this spectrum. The second political judgment is where they fit on what I’m calling the Political Change Spectrum – pictured below. 

Reactionary Dick Cheney to Conservative George H. W. Bush to Reformer Teddy Roosevelt to Revolutionary Che Guevera

Footnote re. spectrum. ((Though I’m pretty confident about the middle two figures, Cheney and Che don’t necessarily cleanly fit into the categories in the way I wanted them to. Clearly, Cheney is a reactionary – and Che was a revolutionary – both fit in that sense. But Cheney was primarily a reactionary concerned about taking radical measures to protect the status quo while the ideal person I would pick would be someone seeking to restore a past status quo. Cheney did seek to restore a past status quo regarding executive authority – constantly harking back to the pre-Watergate presidency – but he didn’t seem to have a historical model for other aspects of his agenda. I wanted to choose an American political figure – but I had some trouble thinking of an American revolutionary who was of historical value and ended up with real power. Even the original revolutionaries were not revolutionaries in terms of this chart – though their French counterparts a few years later were.))

These are also commonly used political terms that describe a political actor’s relationship to the status quo. To break it down further – the reactionary seeks to overturn the current order and return to a previous status quo, or alternately, to use radical measures to protect the current status quo; the conservative seeks to maintain the status quo; the reformer seeks to improve the status quo without overturning it; the revolutionary seeks to overthrow the system and put in place another one.

Political actors generally do not fall exclusively on one part of this scale – and may have some reformist positions and some reactionary ones. While a politician can take a left-wing or right-wing position,

But to a surprising degree, one can predict the actions and positions of a political actor based on their overall position on this spectrum – perhaps because it captures on a fundamental level how a political actor feels about his or her society and their natural temperament.

The reason I bring this up is a question: I have noticed that reactionaries tend to take within themselves (internalize) an exaggerated view of their enemy – and presume when making their own plans – that the enemies tactics and strategies are better than their own. What ends up happening in many of these reactionary groups is that they construct themselves on a model based on their worst fears of their enemy. The John Birch Society, for example, organized in self-sufficient cells with individual members having little to no knowledge of the group outside of their cell; they based this model on their perception of how Communist cells operated. Dick Cheney saw on September 11 the efficacy of violence and destruction to bring a people to heel; he apparently shared the view Osama Bin Laden did that America was not strong enough, not resilient enough to protect it’s way of life while remaining the same America – and so he then sought to unleash the righteous might of America on, eventually, a nation that had nothing to do with September 11 and remake the presidency into a national security dictatorship.

This internalizing of the enemy’s tactics and strategy does not only occur in reactionary groups – but I think – and this is my question – that reactionary groups are defined primarily by their worst fears of their enemy – which they then internalize and model their own organization on.

Reactionaries are more susceptible to this because they have already lost – to some degree – and generally believe their enemy must have in some way won not by honest means but by some clever stratagem. The rationale is that by imitating this stratagem the reactionaries will be able to protect their way of life. But it is impossible to maintain the status quo by radical action – because such actions inevitably upset the very thing being protected.

Categories
Criticism Law National Security Politics The Opinionsphere The War on Terrorism

The Amnesia of the Right

Hilzoy (h/t Andrew Sullivan):

Something about 9/11 seems to have produced a kind of amnesia among some people on the right. It’s as though they think that we have never before had to figure out such questions as: how can we hold dangerous people in detention safely? When someone has served his time and we think he might go on to do something bad, how might we monitor him to ensure that he doesn’t? Suppose we have captured someone who might be guilty of a violent crime, but we do not have enough evidence to charge him: what should we do? 

These are not problems that we confronted for the first time after 9/11. They have been with us from the founding of our country. We somehow managed to face down the world’s most powerful empire, survive a brutal civil war, defeat Hitler, and live for about forty years with an immense arsenal of thermonuclear weapons pointed at our cities, and do all that without giving up on the rule of law. But let nineteen guys with boxcutters fly planes into our buildings and, apparently, we face a Brand New Existential Threat that causes our entire legal history to fly out of our collective heads.

Amen.

Categories
Barack Obama Domestic issues Political Philosophy Politics The Opinionsphere

Equality of Result versus Equality of Opportunity

[digg-reddit-me]It is noteworthy that a certain type of older conservative or right-wing intellectual finds it necessary to insist repeatedly that Obama’s politics is “the same old” stuff as liberals tried earlier in history. These olders intellectuals try to place Obama in the context of typical big-government liberals – and they presume by doing so they are taking the wind out of his sails and making him a more prosaic and less historic figure.

Victor Davis Hanson recently wrote a column explaining that Obama was interested in “the same old equality of result.” He describes the debate going back to the Greeks between “the equality of result” and “the equality of opportunity” – and he identified France with the first and America with the second. His implicit question: Do we want to become France? George Will and others have described Obama’s administration as the third or fourth wave of liberalism. There is a strong need among this group to get across the message that Obama isn’t different – he isn’t change – he’s just more of the same stuff that they – as Republicans – defeated back in 1980 and 1984 and 1994 and 2004. 

But insistince does not make it so.

Obama’s liberalism is not the liberalism of the Great Society or of Jimmy Carter – or even of Bill Clinton. Hanson, Will, and others refuse to acknowledge that in the debate between equality of result and equality of opportunity, they already won. Obamaism is about expanding equality of opportunity – which would be clear if Hanson were doing more than reciting talking points. Look at the three specific programs Hanson cites before claiming Obama wants “equality of results”:

…creating a new health care bureaucracy, cap-and-trade, allotting trillions more for education…

None of these try to achieve an “equality of results.” They are about ensuring people equal opportunity to succeed – and ensuring the market properly prices activities which are damaging to society in general. For example, if you want everyone to have an equal opportunity to succeed, you need to make sure that everyone who is intelligent enough and works hard enough can get an education. Health care costs and concerns have made it much more difficult for smaller businesses to succeed – so Obama is proposing to open up the federal program. This will even the playing field in competition between big and medium- to small-sized companies to a significant degree. Cap and trade imposes a market mechanism to take into account the costs of polluting activities.

Hanson and the others of his generation need to understand that they won the opportunity versus results debate. Liberalism today has evolved to deal with the demands of the moment

Perhaps they should focus on their own political philosophy to see that it does as well.

Categories
Economics Financial Crisis History The Opinionsphere

Theories of the Financial Crisis: The Government Did It!

[digg-reddit-me]

The first person out of the box promoting the idea that the current financial crisis was actually caused by the government (specifically Democrats in the government – and even more specifically Barack Obama) was Rush Limbaugh. On the day Lehman fell (this crisis’s equivalent of September 11), Rush Limbaugh was already trying to exploit it for partisan gain – claiming “Capitalism Isn’t the Problem: Government Caused This Crisis.” On this date of crisis, Limbaugh had already unveiled in a near-complete form what was to become the Republican party’s position on the crisis. He embraced positions that had previously been associated with the Austrian School of Economics – but without much of the ideological baggage they had with them. He only embraced as much of them as was politically convenient – and he applied them only so far as they made Democrats look bad. He also began blaming Barney Frank for this crisis – something which many other right-wingers picked up on. Though I for one find it hard to see how this person who was a member of a Congressional minority had so much power to influence the entire economy and cause this severe crisis and the causal chain has never been made clear. At least to me.

Within a few days of the near-collapse of the financial system – with the crisis still causing panic – Limbaugh was already trying out names he could use to brand the crisis – from the “Democrat-Caused Financial Crisis” to the “Obama Recession.” None of them quite caught on as most people with common sense found it hard to blame Barack Obama for a crisis that occurred before he had won the presidency. But the right faithfully repeated this meme. (It has often seemed to me that Rush Limbaugh – with his vast influence via memes and love of pranks – is a forerunner of and competitor to 4chan.)

I need to say two things going into this: (1) for my analysis, I am merely standing on the shoulders of economists more knowledgeable than I – when it comes to economics especially, I am – clearly – just an interested amateur; and (2) I came to this issue biased against this theory of the financial crisis – although not with my mind closed to it. The best expression of why I started out biased against this idea is probably the analogy Tyler Cowen used while debunking it. Cowen invoked the legal principle of the “thin skull” – in which someone at fault is considered responsible for all the damage caused by their actions, even if a person without a thin skull would not have been seriously hurt by such damages. For example, if you were responsible for a car accident and the other party was injured seriously as they had a thin skull which was damaged much more than a normal skull when it banged into the side window, you would be responsible for even the extraordinary damages resulting from that individual’s medical condition. Cowen explains that those seeking to blame the government for the business cycle and/or the current economic crisis:

…are postulating a very thin skull for markets and then blaming government for the disaster which results from government’s glancing blow to that skull.

A surprising amount of the debate over what caused the current crisis centers around the causes of and solutions to the Great Depression. The reason for this is not because there is widespread disagreement about this among historians or economists – but because the Republican party has embraced recent revisionist histories to make their case against the current intervention. The traditional understanding – between Keynesian and members of the Chicago School is that the Great Depression was made worse by the application of variations of this “thin skull” theory – as Herbert Hoover heeded advice to do little or nothing to combat the financial crisis – preferring to allow the market to fix itself. As Paul Krugman describes (from a 1998 Slate column):

The hangover theory can do real harm. Liquidationist views played an important role in the spread of the Great Depression—with Austrian theorists such as Friedrich von Hayek and Joseph Schumpeter strenuously arguing, in the very depths of that depression, against any attempt to restore “sham” prosperity by expanding credit and the money supply.

But Amity Shlaes authored a recent history of the Great Depression to dispute this traditional understanding which had made her a hero of Republicans everywhere who have begun to cite her book more often than the Bible – almost. Shlaes passes herself off as an intellectual, but seems to be as partisan as Paul Krugman on his worst days. And her understanding of economics is quite shallow compared to the Nobel prize winner’s. Jonathan Chait in The New Republic took on Shlaes book – pointing out the holes in Shlaes revisions – how she attempted to blame liberalism for causing the crisis despite the fact that liberals had been out of power for the eight years before the depression started – and for the first three years after. She manages to pull this off by claiming that Herbert Hoover was a secret liberal interventionist – and blames Hoover’s meager attempts to stop starvation for undermining the recovery that her ideology maintains was imminent. Shlaes also fails to account for how we finally got out. As Chait explains:

[T]he classic right-wing critique fails to explain how the economy recovered at all. In one of his columns touting Shlaes, George Will observed that “the war, not the New Deal, defeated the Depression.” Why, though, did the war defeat the Depression? Because it entailed a massive expansion of government spending. The Republicans who have been endlessly making the anti-stimulus case seem not to realize that, if you believe that the war ended the Depression, then you are a Keynesian.

James Glassman’s influential arguments (in some circles) against any stimulus plan seem to have been inspired mainly by Shlaes’s flawed history.

Today’s crisis appeared at first glance (to most economists and us less enlightened citizens) to have been caused not by government interference but by private bankers controlling vast sums of money taking dumb risks with little government oversight. In time, other factors have come to the forefront, but this basic explanation seems right. Yet right-wingers and the Republican party continue to insist that government intervention was the cause – often out of what they see as a political necessity.

But on the other hand, there are some who seem to have less of a partisan interest in blaming the government for this crisis – and have embraced the Austrian School of Economics out of conviction rather than temporary partisan gain. Ron Paul, for example, blames both Democrats and Republicans for causing this mess. He seems to accept this “thin skull” logic and he has become an influential proponent of the Austrian school of economic thought. This school had its heyday in the 1920s as a result of Hayek, Mises, and others grappling with the issues of that time and perhaps most importantly discovering the business cycle. But this theory was largely abandoned as many saw it as responsible for worsening the Great Depression – as during the first years of the crisis, portions of the Austrian School’s prescriptions were tried. The theory was largely developed before the invention of central banks and while currency was still on the gold standard – but it had important insights in its time. Contemporary proponents such as Ron Paul tend to blame the changes to the financial system created to manage the boom-and-bust business cycle for causing the boom-and-bust business cycle. Yet this cycle has been part of capitalism since it’s inception – and has been managed since Great Depression by central banks and others using Keynesian theory and its successors relatively successfully. 

The appeal of this Austrian School of though though – aside from the partisan appeal for Republicans who are allowed to blame everything on liberals – is a moral one. It functions as a kind of religion-like palliative, telling a comforting story of sin and redemption. The Austrian business cycle tells of a recurring morality tale in which virtue is corrupted, until the sin of easy credit leads to the fall of the system. Then, the Market cleanses the world and virtue is restored to it’s proper place. The proper role of the economist in this is to act as a kind of priest – urging the people to stay true to this belief system in the face of adversity – to keep their faith that eventually the god of the Market will make everything better.

This fits well with the religious right of the Republican party – and perhaps this is why despite the theory’s rejection by most mainstream economists as outdated, it is gaining adherents among the Republican party, including the “rising star” Michelle Bachman.

[Image licensed under Creative Commons courtesy of elandru.]