(This was originally posted on DailyKos, where it was suggested that I post this here. It has been slightly edited.)
Unless you've been living under a rock you know that we are in an economic death spiral and that things will get worse before they get better. All things will pass, however, and unless things crater for good, we will eventually pull out and begin economic recovery, in one year or three or ten, and we will be ... well, where will we be? What are our economic goals? What do we want from an economy?
If I may speak rather broadly, since the end of WWII the world has embarked on a few different economic philosophies. In the West our goals were full employment, price stability, and growth that could be sustained, at least in the medium term. In the Soviet bloc, a centrally planned economy had as a primary priority 100% employment, whatever the cost. In the US, the post-WWII approach collapsed under persistent inflation driven by our vulnerability to OPEC and the costs of Vietnam; and with the election of Ronald Reagan came a sea change in US philosophy, bringing the rise of the neoliberals and their insistence on deregulated "free markets". It's not entirely clear to me how "free" those markets were; it seems clear to me that the goal was opportunity unfettered by government (not, of course, to be confused with opportunity for all, much less equal opportunity). Nearly thirty years on the neoliberal experiment has failed from its contradictions and inefficiencies, much as the Soviet experiment collapsed in the late 1980s, and we now reap the consequences.
So now what? We will eventually recover from this failure, but ... where do we go from here? What do we want from an economy? 100% employment? Unlimited opportunity? At least a living wage for everyone? A fiduciary responsibility to the future? The "market" is our creation. President Obama has talked about rejecting the "failed policies" that got us into this mess, which is a major step forward, a necessary but it is not a sufficient condition. We can aim for more than one goal, but some are incompatible with others. At least there is one thing we have conclusively demonstrated: the extremes of too much or too little government involvement end in disaster. That means we need to get involved and take responsibility -- we can't just pass the buck to some Invisible Hand -- but we also need to know when to back off.
I have no answers, only questions. But I think it's not too early to think very seriously about this. Here are a few thoughts, unsystematically thrown out, starting with what appear to be implicit assumptions.
Status quo ante
This ought to be a nonstarter. The problem is that there's something to like about this. Rapidly growing retirement portfolios and 401ks. Double digit returns on investment. Regulatory agencies that prize financial innovation and risk-taking.
Too bad it doesn't work. Too bad it makes only paper money, not real wealth. This is how we got into this mess, going back to it will just result in more bubbles and speculation, and we'll be revisiting 1907, 1929, 2008 sooner rather than later. I hope we are not that stupid.
Status quo ante with financial regulation
Gramm-Leach-Bliley, the Commodity Futures Modernization Act, the encouragement that Greenspan's Fed gave to innovations in speculation have all contributed mightily to the mess we're in now. However, if we insist on transparency of financial activity and we enact regulations that will prevent the worst of the abuses, we can take advantage of the efficiency of free markets while preventing the excesses that an unfettered free market invariably falls into. These regulations could range from higher margin requirements (pre-2004, perhaps) to a crackdown on SIVs and other devices used expressly to increase leverage off the balance sheet to compartmentalization of finance to prevent disaster in one sector from taking down everything with it (basically an updated Glass-Steagall) to regulated exchanges for currently unregulated trades such as credit default swaps, etc etc. We might go farther and demand that banking be boring again, a way to allocate financial capital efficiently to the productive economy, and not to speculation.
It's kind of hard to tell, but it seems that many outside finance would like to see this, perhaps including the new Administration. I suspect many in finance would like at least some regulation to increase confidence in the system and thereby improve efficiency. Is this what we want?
Personally, I say no. Yes certainly to getting finance under control, but no to status quo ante. Financial regulation by itself is insufficient to deal with systemic problems in our economic system. Here are some of those problems: most have been covered elsewhere in detail -- Paul Krugman, Garrett Hardin, Marjorie Kelly, Peter Barnes, Robert Reich, Jeffrey Sachs to name a few -- so I won't belabor the points. But keep in mind that they're all interrelated.
The Ownership Society
The "Ownership Society" is an idea pushed by George W. Bush and the neocons encouraging Americans to take greater control of their personal affairs, though it predates Bush by at least 2 decades. In the Ownership Society, we would have greater personal control of health insurance and our children's education, we were encouraged to buy houses. Instead of fixed benefit pension plans, we contribute employer-matched funds invested in the stock market. This encourages personal responsibility, and by owning a piece of the market, we become stakeholders in its success.
This all sounds good, and there are positive aspects, but there are also serious ramifications, possibly unintended. I don't want to get into school vouchers or how the framing conveniently confuses health insurance with health care or or real estate here: for now I am concerned with two aspects of the Ownership Society.
The first is the opposition of personal responsibility with governmental responsibility. This is a democracy -- it's our government, and if we disagree with it it is our responsibility to throw it out. It is our responsibility to become educated, to stay informed, and to be politically active. We're off to a good start this past January 20th, but it's only a start, and there is a long way to go. Now it is certainly true that a government can provide too much and that the individual loses initiative -- the Soviet Bloc is the extreme example -- but the opposite is also problematic. For many things, such as infrastructure or health care, the individual cannot exert economies of scale. Here governmental action is far more efficient, and to oppose governmental responsibility in the name of personal responsibility is really a way to transfer power to those with greater means. This is fundamentally undemocratic. The government is -- or should be -- the voice of we the people, and we must remember that.
The other aspect is the idea that one becomes a stakeholder in the market by owning a piece of it. Why is "ownership" so important here? Why this Divine Right of Capital? as Marjorie Kelly asks in an excellent book by that name. Kelly notes that the shareholder is a type of absentee landlord, one who contributes very little in a real sense but to whom the governance of the corporation is accountable. Labor, who provides the real productivity, is treated as a commodity; that is more than can be said of community and resources held in common. Kelly and Robert Reich among others point out that the fact that a large fraction of the population is invested in stocks, either directly or through things like mutual funds, retirement accounts, or state pension funds, puts systemic pressure on corporations to maximize shareholder value. This means externalizing all costs possible and minimizing remaining costs. One of the major costs will always be labor: so jobs are outsourced to places with low labor costs and weak (or locally bribable) environmental regulation; so wages are flat while productivity keeps rising; so (until the Big Crash) the stock market was rising while employment stayed weak. Wall Street heralded Chainsaw Al Dunlap for his ferocious cost-cutting -- sacking workers -- at least until he drove Sunbeam into the ground and was investigated by the SEC; the same Wall Street criticized Costco CEO Jim Sinegal for being too generous to workers, even while Costco was profitable. This leads to contradiction: in our consumer economy we are told to increase aggregate demand (spend) while at the same time jobs are outsourced and wages do not keep up with inflation. We managed for a while by going to 2-income families, and when that was not enough by increasing household debt, until one day we woke up to find ourselves impossibly overextended. Now with one eye we look at how our 401k is performing, with the other we worry about job security. Sorry, but in this system we can have one or the other, at least until the system breaks and we get neither. We need Something Better.
I am by no means saying that the shareholder should have no stake, but I am in agreement with Kelly in that it is only fair to require that labor have an equal stake. They are after all the ones who provide the productivity; they also provide a significant fraction of aggregate demand. To those who object that labor is indeed a commodity, that it provides no creativity, I say that shareholders provide no creativity either, and that treating labor only as a commodity fails the reality test, as we see now. To those who object to the wage-price spiral, that's a bigger problem related to the necessity of growth, and another reason why we need structural change. Right now we keep inflation in check by keeping wages flat, by marketing increasing amounts of disposable and unnecessary must-have junk (Peter Barnes calls them "thneeds"), and by moving money to the rich, who will spend relatively less of it. Not just labor but perhaps community too should have a formally defined stake. Right now community interests are protected by government regulation, in which corporate lobbying plays a disproportionate role. But communities too can be and have been bought.
Tragedy of the Commons
In 1968 Garrett Hardin published a paper in the journal Science titled The Tragedy of the Commons, in which he argues that individuals acting in their own self-interest will ultimately destroy a shared resource, because the gain they get from extracting more than their fair share accrues to them, but the damage they cause by overextraction is shared by the community. This is more than the case that profits are privatized, costs are socialized, which would be bad enough: it is in fact in everybody's short term interest to extract as much as they can before the commons is ruined. The only way out is by social compact, or, in Hardin's words, "mutual coercion mutually agreed upon".
The unfettered free market cannot deal with the tragedy of the commons. A company cannot pay the full price of what they take from the commons because another company that does not will drive it out of business. The only ones left standing are the ones best at externalizing their costs. At some point the community might (or might not) step in, using the club of social compact (government regulation). There are obvious and potentially catastrophic problems involving the commons that are coming and that we've been warned about for years, and piecemeal, ad hoc treatments are not going to be terribly effective. Yet even now it is difficult to get the public to think about them.
Climate change, ocean acidification, overfishing, rainforest clearing, many other issues all involve the commons. Is it time to think of a structural approach to these problems? Peter Barnes, in Who Owns the Sky and Capitalism 3.0 suggests a "sky trust" approach, a cap and dividend system in which fees from the right to use the commons (say, GHG emissions) is paid back to the citizen as a dividend. This puts a price on the resource and provides incentive not to use that resource or at least use that resource more efficiently. The "commons held in public trust" approach does seem to work where tried -- in the US, the Alaska Permanent Fund (while this one is extractive, the benefits accrue to all Alaska citizens), or on a smaller but more comprehensive scale, the Marin Agricultural Land Trust, are two examples.
The concept of a commons held in trust also requires a fiduciary responsibility to the future. If we are to maintain a healthy commons, which we must for health and prosperity (poverty is just as destructive as affluence), it must be held for the future. In the long term, we may all be dead, but our children won't be, or theirs. That markets price-in the future is if not false, clearly inadequate. It took government action ("mutual coercion mutually agreed upon") to enact the Clean Air Act, the Clean Water Act, it will take government action to deal with depleted fisheries and rainforest clearing. But we need a structural approach, not a piecemeal one. In fact we have a working model for ensuring a fiduciary responsibility to the future: Social Security. (Of course we also have a nonworking but popular antimodel for that -- running huge deficits and calling for more tax cuts.) There may be other approaches, but one thing we must keep in mind: this is a finite planet, with finite resources, and overuse of the resource is destruction of the resource. If it comes to a fight between the market and physical reality, I know who wins.
Growth may be an odd thing to worry about when we are facing deflation -- Obama emphasized the need to return to growth in the presser -- and we do need growth in the near term to get back on sound footing. At some point, however, we need somehow to reconcile the reality of a finite planet with the economic necessity of growth. The idea of a steady-state economy goes back at least to John Stuart Mill but more recently explicated by Herman Daly. I don't pretend to know how such an economy would really work: there are many economic theories out there, not all that many are tested, and of those that have many have failed. Nor do I know how we would get there. But ultimately our options are either steady-state or overshoot-crash-recover-repeat with increasingly lower crash thresholds as resources get used up. At the very least we need a serious discussion.
In the end, these are questions of cultural values, of national priorities, not economics. After all the economy is a social construct, and we define what we want, keeping in mind what is possible and what isn't, the certainty of unintended consequences, and that too much and too little management are sure to fail. And one other thing to remember: economics is all about the allocation of scarcity. When we make a choice we also choose to give some things up. What are we willing to give up? What is nonnegotiable? Even those things we know we need to give up -- double digit returns year after year, fossil fuels, etc -- are very difficult to let go. We will not achieve a long-term sustainable economy without changes in what we value.
President Obama said in a Feb 11 town hall meeting that this is a time for "turning crisis into opportunity". We have not just a tremendous opportunity but also a real responsibility now to fix major structural issues: call it Shock Doctrine in reverse, call it creative destruction of the existing system. Getting there will not be easy, will not be quick. But to get there we need a vision of where "there" is. So once we get past the current crisis -- where are we going? What do we want from an economy?