Back in 2010, German Chancellor Angela Merkel was making a major push for “the primacy of politics over the markets.” To a far greater extent, the entire doctrine of Keynesian economics which is now crashing against the rocks of high government debt levels and broad economic reality, is founded on the notion of the primacy of politics: that politics must have such primacy.
My question: why?
Let’s roll the clock back to the very basic question, the one we’re not supposed to ask. Never mind that there is a lot of reason to doubt that politics can have primacy over the markets, why is it so critically important that they must?
Well, because you can’t have socialism otherwise. If the government can’t deliver results because the government isn’t powerful enough, one of the huge driving forces justifying the expansion of government into every aspect of human and national life, loses its potency. After all, one major and oft-repeated reason for intervention is market failure, markets simply not delivering an acceptable outcome and thus being in need of correction. If one establishes that the government can’t correct the market, but can only add all new distortions, well, one might become a skeptic of the whole enterprise.
You know. Like I have.
I accept that people pushing this vision of society have the best of intentions. I have no problem with good intentions. However, I have long been coming around to the viewpoint that when a major economic correction hits, government cannot “fix” the problem. Government can throw a lot of money at the problem through deficit spending; it can devalue its currency and push inflation (which may or may not be visible in absolute terms because it is fighting the destruction of virtual capital in the economy); but, when push really comes to shove, the problems are too big for government to solve.
It’s not even just an issue of debt. Canada didn’t have a national debt at all as of the late 70’s, when Prime Minister Trudeau began deficit spending for the purpose of getting Canada out of the economic doldrums. What it did was begin an addiction to deficit spending that became entrenched in politics for decades, and has only been brought under control with substantial national pain and difficulty.
So even if you do have the money, and you do have the ability to borrow significant amounts, a modern national economy is so huge that government can’t “save” it… and frankly, the evidence has never existed that government did.
Rather, we have a theory that government must have that power, because any different answer is not politically acceptable.
When you start with the conclusion, and then work your way back, you get this: a bunch of competing doctrines which are inflicted upon the real world to “prove” that they work. It happens plenty with religion. I’m just not willing to humor it for economics anymore.
Long story short, I see limits on what a government can do in the face of a huge economic crisis… and that includes both crises caused by government and those caused solely by the markets.
In other words, whether it’s a Greenspan-fueled housing bubble or a tulip mania, whether it’s caused by soaring public sector debt or soaring bank debt, government can’t “fix” it. There are really only two kinds of downturns when you really get down to it:
- Very sharp, shorter downturns with violent market corrections and a vibrant turnaround.
- Dampened, but longer downturns with obstacles preventing full market correction, prolonging stagnation and suffocating recovery.
Our choices determine which it is.
Before the United States caught the government intervention bug, its economic “panics” were short, extremely painful… and then they were followed by renewed bouts of prosperity. Dissatisfaction with this process led to the rise of institutions intended to tame and defeat the business cycle, beginning with the Federal Reserve. The main effect has been to prolong the business cycle, rather than end it; the highs last longer, and the lows last longer.
I’m not going to argue that prolonging is necessarily bad. It is a choice. Japan is more satisfied with low growth during its “lost decades” than with wholly blowing up its existing economic order and rendering the stored wealth of its elderly citizens debased by inflation. Societal stability is more important than making a grab for heavy growth. For that matter, a lot of people think that the planet can’t afford economic growth anyway, by first world countries at least. I don’t necessarily agree with that, but a lot of people do hold such positions.
It’s a choice.
In the end, you can throw a lot of money at the problem – and of late, countries have done a lot of that – and still have a very painful correction, just over a longer length of time. Instead of being more acute at any one moment, it becomes a long, depressing affair. Also, the national government itself becomes heavily indebted trying to “save” the country from the market.
I’m saying, it is a futile quest. Government never had the power to do this. It hasn’t in the past, it doesn’t now, and it won’t. The likes of Greece and Ireland cannot be saved by simply escalating to the point where “the primacy of politics” involves a titanic showdown with the bond markets so that “politics” can “win.” There are no winners here, and at some point, the devil gets his due.
It’s not that the market “wins” either, but the market will be back.
Looking at this Orientally, there is an art to doing less. There is real, tangible cause to say, let the economy heal itself. Surely there is a range for government action, but that range is limited, and furthermore, would be better served by dealing with the root causes of economic problems, if that is possible. For the US, it’s housing, for instance. Beyond that… do less.
Doing less is politically repugnant, a heresy against Keynesian economics, and makes it pretty hard for politicians to be elected when their raison d’etre is to deliver goodies to the electorate… but it is increasingly clear that in the long run, we’d be better off and faster on track to greater prosperity in the future if we did less and accepted that some pain simply must be endured; it’s just a matter of when.
As I said, I don’t expect anyone to actually do this. Logic and facts don’t matter here. Accepting government impotence would be a blow to an entire political doctrine. I do not expect such a thing to be conceded… however wise it might be. And so the carousel will continue. – J