By JR on Sunday, August 07, 2011
The economic crisis that began in 2008 has thrown up several questions. How can we live with banks that are too big to fail? How can we support financial institutions during a liquidity panic without creating incentives that make liquidity panics inevitable?
To these must be added another question: After a financial crisis, how do we short circuit the political imperative to introduce polices that inhibit recovery by hitting business over the head?
FDR's depredations somehow never became much of a focus of the copious literature of the Great Depression. The historiography of the Obama Depression will not be so forgiving. American business is luckier today, in a sense: Its success is more rooted in a global economy. U.S. companies are profitable even as the domestic economy lags.
Thus people like Steve Wynn, whose sharp critique of Obama policy on an earnings call turned heads last month, do not fear to speak up. Las Vegas may be in the dumps, but Mr. Wynn boasts that Wynn Resorts today is "a Chinese company in many respects and [in terms of] revenues and the rest of our financial posture" thanks to its bet on booming Macau.
A great whoosh of buy-in has greeted the idea that post-debt crisis recoveries must always be slow. But unless a lot of CEOs are lying, a policy onslaught designed to fulfill the pent-up wishes of various Democratic constituencies has been the key anti-elixir of growth.
Instead of a "stimulus" to create jobs by financing useful investments that would have paid a growth dividend in the future, we got a debt-fueled permanent expansion of entitlements and the size of government.
In health care, instead of reforms to encourage competent consumers not to treat health care as a free lunch, we got a doubling down on health-care free lunchism.
In banking, instead of new incentives to cause creditors to pull in the reins on risk-taking banks, we got a formalization of too big to fail.
All economic crises begin differently—this one began in housing—but eventually they morph into the same old crisis of forgetting what works. Think about the last big crisis of faith in American capitalism in the early 1980s. The panic was eventually crystallized in dueling Harvard Business Review articles by George Gilder and Charles Ferguson. Mr. Ferguson, an MIT-based consultant, argued the U.S was dooming itself to vassalage unless Washington brushed aside small, poorly-funded entrepreneurs and concentrated regulatory favors and subsidies on giant firms like IBM, AT&T, Digital Equipment and Kodak.
Mr. Gilder championed the then-emerging Silicon Valley paradigm. He quoted technologist Carver Mead: "We depend on the innovations of the citizens of a free economy to keep ahead of the bureaucrats and the people who make a living on control and planning. In the long term, it's the element of surprise that gives us the edge over more controlled economies."
Who won hardly needs to be belabored except that it apparently does need to be belabored. Almost everything Mr. Obama understands as pro-growth consists of bets on "bureaucrats and the people who make a living on control and planning."
Disregarded, meanwhile, is the 1980s' real lesson, embodied in a prescient little book edited by the late Joseph Pechman, dean of tax scholars at the Brookings Institution. Entitled "World Tax Reform: A Progress Report," his 1988 volume showed how country after country was following the U.S. in adopting Reagan-style rate-flattening and tax simplification.
We had plenty of unwise polices in the mix too. Yet, over the next 20 years, policies that allowed private investment and innovation to reap their natural reward paid off. Globalization may be a megatrend, but the United States is still a big economy, and who doubts that if the U.S. were following a sounder course at home that it would matter less what China is doing with its currency or how the Europeans are handling their debt mess?
Mr. Ferguson has since refashioned himself as a maker of leftwing films about the Iraq war and financial meltdown, but his spirit lives on. Mr. Obama now craves a federal infrastructure bank, apparently still unable to see how growth might emerge except by bureaucrats bossing around tax dollars.
And yet the lord smiles on the U.S. Mr. Obama's own fiscal commission—his shamefully ignored Simpson-Bowles Commission—proposed a Reagan-style tax reform. Tax reform is the political fulcrum for addressing the growth shortage, the fiscal crisis and our runaway health-care prices problem. It's the one idea that reaches across the partisan divide. It might be the only thing that could save the Obama presidency.