Party of 1

New York University economics professor Nouriel Roubini has come to be known as “Dr. Doom” because of his prescience in forecasting the ongoing financial crisis.  He has offered his thoughts on the outlook for the world economy in an interview with Germany’s Der Spiegel. “I’m not a perma-bear. I am not always negative about the future. Rather, I want to assess the situation correctly. But if I look at the economic picture of the world now, I still see plenty of dark clouds.”

I’d like to focus on one aspect of Dr. Roubini’s remarks. He asserts that “crises are part of capitalism’s DNA. They are not the exception but rather the rule. Many elements vital to capitalism, like innovation and risk taking, also trigger frequent collapse. And what we just went through could get much worse in the future.… They are not inevitable. But if you look at history, you will see patterns repeated — such as excessively loose monetary policy, leveraged vulnerabilities and weak regulation. And we will see them again. Probably we will have even more crises in the future.”

In the aftermath of 1989 we were browbeaten with triumphalist rhetoric that proclaimed the superiority of capitalist economics, which had won such a comprehensive victory that it amounted to an “end of history.” Skeptics noted that the the system nevertheless harbored a tendency to lurch from crisis to crisis. Looking at the last two decades alone, we have seen currency crises in Mexico and throughout Asia, not to mention the difficulties dating back to September 2008 or before.

We tend to associate capitalism with the Industrial Revolution, so that its lifespan may be considered to have run about two hundred years now, give or take a few decades.  Depending on one’s perspective, that length of time may be regarded as no more than the blink of an eye. The system has indeed suffered periodic crises, in the aftermath of which it had to be reformed, with measures introduced to get through the emergencies and prevent, or at least delay, their recurrence. Every time, the ideologues resisted the emergency measures, denouncing them as violations of the system’s highest principles. Revisionist histories of the crises were pumped out ex post facto, proclaiming that everything would have been fine if only the principles of laizzez-faire had been adhered to strictly.

It may be conjectured that people will continue to accept the system if, and only if, the recurring crises are not so severe as to be unbearable. If the system is indeed susceptible to crisis, and if the ideologues continue to object in principle to measures aimed at ameliorating the crises, can this be a stable situation in the long run?

The size of the deficit in the most recent budget has the public spooked, and pressure is building for some sort of deficit-reduction plan, which has prompted President Obama to create a commission for this purpose, headed by Republican Alan Simpson and Democrat Erskine Bowles. The commission was created by executive order; Congressional Republicans refused to support a congressional commission, deeming it a scheme to get bipartisan support for tax increases.

Deficits and their reduction are a preoccupation of the affluent rather than those less well-off, which explains why we hear so much about the issue in a system dominated by affluent voters. Dr. Jamie Galbraith (son of John Kenneth), a faculty member at the LBJ School at the University of Texas, has a different take on the matter in the current issue of the Nation. Highlights:

“To cut current deficits without first rebuilding the economic engine of the private credit system is a sure path to stagnation, to a double-dip recession–even to a second Great Depression. To focus obsessively on cutting future deficits is also a path that will obstruct, not assist, what we need to do to re-establish strong growth and high employment….

“For ordinary people, public budget deficits, despite their bad reputation, are much better than private loans. Deficits put money in private pockets. Private households get more cash. They own that cash free and clear, and they can spend it as they like…. And this, in the simplest terms, explains the deficit phobia of Wall Street, the corporate media and the right-wing economists. Bankers don’t like budget deficits because they compete with bank loans as a source of growth. When a bank makes a loan, cash balances in private hands also go up. But now the cash is not owned free and clear. There is a contractual obligation to pay interest and to repay principal. If the enterprise defaults, there may be an asset left over–a house or factory or company–that will then become the property of the bank. It’s easy to see why bankers love private credit but hate public deficits.

“It’s true that government can spend imprudently. Too much spending, net of taxes, may lead to inflation, often via currency depreciation–though with the world in recession, that’s not an immediate risk. Wasteful spending–on unnecessary military adventures, say–burns real resources. But no government can ever be forced to default on debts in a currency it controls…. Nor is public debt a burden on future generations. It does not have to be repaid, and in practice it will never be repaid. Personal debts are generally settled during the lifetime of the debtor or at death, because one person cannot easily encumber another. But public debt does not ever have to be repaid. Governments do not die–except in war or revolution, and when that happens, their debts are generally moot anyway.

“If we could revive private lending, should we do it? Well, yes, up to a point there is good reason to have a robust private lending sector…. But right now, we don’t have functional big banks…. You don’t have to like budget deficits to realize that we must have them, on whatever scale necessary to restore growth and jobs. And we will need them not just now but for a long while, until we’ve shaped a strategic program for investment, energy and the environment, financed in part by a reformed, restored and disciplined financial sector.”

In the New York Times‘ online-only “Opinionator” feature, Timothy Egan reports from a development in Lathrop, California that has turned into something of a suburban ghost town. “Dirty flags advertise rock-bottom discounts on empty starter mansions. On the ground, foreclosure signs are tagged with gang graffiti…. In strip malls where tenants seem to last no longer than the life cycle of a gold fish, the bottom-feeders have moved in. ‘Coming soon: Cigarette City,’ reads one sign here in Lathrop, near a ‘Cash Advance’ outlet.”

Among Egan’s conclusions: “San Francisco, Portland, Seattle and San Diego … have fairly strict development codes, trying to hem in their excess sprawl. Developers, many of them, hate these restrictions. They said the coastal cities would eventually price the middle class out, and start to empty.

“It hasn’t happened. Just the opposite. The developers’ favorite role models, the laissez faire free-for-alls — Las Vegas, the Phoenix metro area, South Florida, this valley — are the most troubled, the suburban slums.

“Come see: this is what happens when money and market, alone, guide the way we live.”

John Judis on Obama’s remarks comparing bankers’ bonuses to ballplayers’ salaries, at the New Republic website: “If you have ever had an argument about excessive executive salaries with a rich Republican—I can recall one, for instance, with a downtown corporate tax lawyer—he will invariably compare CEO salaries to those that athletes and entertainers make. And here we have a Democratic president using this spurious ploy.”

Germany’s Der Spiegel reports on political tensions between the United States and China, including Chinese resistance to American demands for currency “rebalancing.”

“The ‘American elite’ has ‘no idea’ what fatal consequences a revaluation of the yuan could have, says political commentator Liang Jing, adding that it would lead to a collapse in Chinese exports and ’cause a worsening in domestic income distribution.’

“What that means in plain language is that Chinese factories would need to lay off many workers and the divide between rich and poor would quickly grow wider — potentially plunging the country into social unrest.

“And if the Chinese government were to start allowing money to flow freely across its borders, something Washington is also pushing for, it would mean an ‘unprecedented exodus’ of capital from the country, the commentator says.”

Germany’s Der Spiegel reports on political tensions between the United States and China, including China’s reasons for resistance to U. S. pressure for currency “rebalancing.”

“The ‘American elite’ has ‘no idea’ what fatal consequences a revaluation of the yuan could have, says political commentator Liang Jing, adding that it would lead to a collapse in Chinese exports and ’cause a worsening in domestic income distribution.’

“What that means in plain language is that Chinese factories would need to lay off many workers and the divide between rich and poor would quickly grow wider — potentially plunging the country into social unrest.

“And if the Chinese government were to start allowing money to flow freely across its borders, something Washington is also pushing for, it would mean an ‘unprecedented exodus’ of capital from the country, the commentator says.”

The Weekly Standard has published the musings of Harvard professor Harvey Mansfield on Barack Obama and health care. It’s a bilious piece — maybe Mansfield got up on the wrong side of the bed before composing it. Someone once said that he would rather be ruled by the first 500 names in the telephone book, then by the Harvard faculty. This piece looks like a good illustration of the point. (The latter part of the piece consists of speculation about the motivations of Barack Obama — which, for me, veers off too far in the direction of innuendo. Readers may judge for themselves.)

Mansfield: “A government takeover does not require the single-payer system of Canada and Britain; it follows easily enough from the government’s guarantee of health care to all…. This is government takeover in principle if not in administration—which is not to say that a decentralized administration would make no difference.”

I guess he’s out to portray anything government might do in this area as a “government takeover,” but he hasn’t remotely convinced me. We already have government involvement in the form of Medicare, Medicaid, and the SCHIP program.  Maybe in his heart of hearts, Mansfield believes there has already been a “government takeover.” That could very well be, because he is a Straussian — a follower of philosopher Leo Strauss. You can never tell what such people really think.

The British have indeed had a “government takeover” of health care, several decades ago — the National Health Service (NHS). The doctors all work for the NHS. The hospitals are all operated by the NHS. The British have all sorts of complaints about the NHS — but they are by no means prepared to get rid of it. David Cameron, leader of the Tory party, recently placed the NHS effusively at the recent Conservative party conference. Still, few people that I know of, least of all the Obama administration, have proposed anything remotely resembling the NHS for this country. (Furthermore, as far as I know, there is no “guarantee of health care to all” in either the House or the Senate legislation — although insurance coverage would be expanded.) Has Mansfield shown why the term “government takeover” should not be reserved for a British-style NHS? Why, not even the Canadian system, to my knowledge, takes “government takeover” as far as the British NHS. As far as I understand it, in that country the doctors are self-employed, and the hospitals may be on either a  for-profit or nonprofit footing — although the government is indeed the “single payer.”

More temperate is David Paul Kuhn on the RealClearPolitics site for Monday — although Kuhn appears to believe that Obama has bungled health care, and might as well move on to reform of the financial system. “Too many forget that William Jennings Bryan’s dangerous extremes became Teddy Roosevelt’s reasonable reforms, that Franklin Roosevelt’s New Deal carried some of Huey Long and Francis Townsend’s good ideas…. It was, above all else, Wall Street that brought us down. It was Americans’ tax dollars that bailed out the big banks – radical measures to save the financial class, conventional half-measures for most others. And not all responses are reckless. Capitalism has withstood clear and reasonable reforms before…. Obama has begun to speak like a president who understands his people’s cause. Now he must resolutely prove it.”

Mark Whitehouse in Monday’s Wall Street Journal: “Economists estimate that to pay down its debts in the long term, the U.S. government needs to cut spending or raise taxes by a total of as much as 9% of GDP. That’s about twice what the government currently spends on national defense…. Given the vehement opposition any measure would likely encounter, economists aren’t optimistic they’ll happen anytime soon.”

Many economists make the situation sound apocalyptic, with a revolt looming in financial markets if debt and deficits are not brought under control. It’s far from clear whether a polarized political system can deal with the matter — and the system may be even more polarized after November 2010, if anti-tax “tea party” Republican conservatives gained power in Congress.

The thought has occurred to me that if the situation persists, elite opinion may coalesce around an independent presidential candidacy in 2012….

David Wessel comments in the New Year’s Eve edition of the Wall Street Journal on the prospects for a deficit-reduction commission: “Commissions represent a failure of the ordinary political process to grapple with significant issues. But there’s a growing sense among political insiders that partisan tensions are so acute that only a commission or other device can address the issue.”

Partisan tensions are indeed acute — and a good example would be the WSJ’s own editorial page, as of Tuesday: “President Obama is poised to pivot next (election) year and denounce the horrors of deficit spending. So the White House is now floating a bipartisan commission to reduce federal borrowing, and much of the political class is all for it…. A budget deficit commission is nothing more than a time-tested ploy to get Republicans to raise taxes…. The real goal is to get GOP political cover for tax increases so Democrats aren’t run out of town in 2010 and 2012 for blowing up the national balance sheet…. The Democrats will use a tax-and-spend commission to confront Republicans with the false choice between huge tax increases or fiscal disaster. Republicans should respond with their own choice: They’ll agree to a deficit commission only if it takes tax increases off the table….”

Over the past week or two, ever since British Chancellor Alistair Darling’s pre-Budget report (PBR), I’ve discussed several stories in the overnight London press reviews about Darling’s proposed “supertax” of 50% on bankers’ bonuses. Objections were heard immediately that the measure would ruin the London-based financial-services industry (referred to in the British press as the “City of London” — roughly equivalent to “Wall Street.” American readers may not realize that the “City of London” does not refer to the entire metropolitan area of the British capitol).

Chiming in on this question is Simon Nixon in the “Heard on the Street” feature of Saturday’s Wall Street Journal. “Past windfall taxes didn’t drive industries offshore. And bankers aren’t as mobile as they think. Financial centers need infrastructure and the building space to accommodate modern trading floors. Banks don’t relocate in response to a one-off tax. And besides, relocate where?”