Commentary 38- Dionne on Capitalism

Capitalism's Reality Check

By E. J. Dionne Jr.
Friday, July 11, 2008; Page A17

The biggest political story of 2008 is getting little coverage. It involves the collapse of assumptions that have dominated our economic debate for three decades.

Since the Reagan years, free-market cliches have passed for sophisticated economic analysis. But in the current crisis, these ideas are falling, one by one, as even conservatives recognize that capitalism is ailing.

You know the talking points: Regulation is the problem and deregulation is the solution. The distribution of income and wealth doesn't matter. Providing incentives for the investors of capital to "grow the pie" is the only policy that counts. Free trade produces well-distributed economic growth, and any dissent from this orthodoxy is "protectionism."

The old script is in rewrite. "We are in a worldwide crisis now because of excessive deregulation," Rep. Barney Frank (D-Mass.), the chairman of the House Financial Services Committee, said in an interview.

He noted that in 1999 when Congress replaced the New Deal-era Glass-Steagall Act with a set of looser banking rules, "we let investment banks get into a much wider range of activities without regulation." This helped create the subprime mortgage mess and the cascading calamity in banking.


While Frank is a liberal, the same cannot be said of Ben Bernanke, the chairman of the Federal Reserve. Yet in a speech on Tuesday, Bernanke sounded like a born-again New Dealer in calling for "a more robust framework for the prudential supervision of investment banks and other large securities dealers."

Bernanke said the Fed needed more authority to get inside "the structure and workings of financial markets" because "recent experience has clearly illustrated the importance, for the purpose of promoting financial stability, of having detailed information about money markets and the activities of borrowers and lenders in those markets." Sure sounds like Big Government to me.

This is the third time in 100 years that support for taken-for-granted economic ideas has crumbled. The Great Depression discredited the radical laissez-faire doctrines of the Coolidge era. Stagflation in the 1970s and early '80s undermined New Deal ideas and called forth a rebirth of radical free-market notions. What's becoming the Panic of 2008 will mean an end to the latest Capital Rules era.

What's striking is that conservatives who revere capitalism are offering their own criticisms of the way the system is working. Irwin Stelzer, director of the Center for Economic Policy Studies at the Hudson Institute, says the subprime crisis arose in part because lenders quickly sold their mortgages to others and bore no risk if the loans went bad.

"You have to have the person who's writing the risk bearing the risk," he says. "That means a whole host of regulations. There's no way around that."

While some conservatives now worry about the social and economic impact of growing inequalities, Stelzer isn't one of them. But he is highly critical of "the process that produces inequality."

"I don't like three of your friends on a board voting you a zillion dollars," Stelzer, who is also a business consultant, told me. "A cozy boardroom back-scratching operation offends me." He argues that "the preservation of the capitalist system" requires finding new ways of "linking compensation to performance."

Frank takes a similar view, arguing that CEOs "benefit substantially if the risks they take pay off" but "pay no penalty" if their risks lead to losses or even catastrophe -- another sign that capitalism, in its current form, isn't living by its own rules.

Frank also calls for new thinking on the impact of free trade. He argues it can no longer be denied that globalization "is a contributor to the stagnation of wages and it has produced large pools of highly mobile capital." Mobile capital and the threat of moving a plant abroad give employers a huge advantage in negotiations with employees. "If you're dealing with someone and you can pick up and leave and he can't, you have the advantage."

"Free trade has increased wealth, but it's been monopolized by a very small number of people," Frank said. The coming debate will focus not on shutting globalization down but rather on managing its effects with an eye toward the interests of "the most vulnerable people in the country."

In the campaign so far, John McCain has been clinging to the old economic orthodoxy while Barack Obama has proposed a modestly more active role for government. But the economic assumptions are changing faster than the rhetoric of the campaign. "Reality has broken in," says Frank. And none too soon.




My Commentary:

Zemack wrote

Does the term disingenuous come to mind? I’d be surprised if Mr. Dionne kept a straight face while writing this article. There is no “capitalism, in its current form.” There is only laissez-faire capitalism; the social system based on individual rights and a government that protects those rights…or statism, the social system of dictatorship. What we have today is a mixture of the two…i.e., a mixed economy.

The part that is failing today is not capitalism. Where do you see it?

Not in medicine, where 87% of America’s health care spending represents people spending other people’s money. And where the insurance market is buried under hundreds of government coverage mandates. And where the absurd government-imposed third-party-payer system leaves the individual who ultimately pays at the mercy of his boss or the state. And where massive government price-fixing through medicare, medicaid, and other wealth redistributionist schemes masquerading as “insurance” makes a mockery of market pricing. And where a new form of slavery has been created…EMTALA…which forces hospitals and their doctors to treat free of charge any free-loader who walks through an emergency room door demanding free healthcare.

Not in energy, where the industry is beset by government-imposed restrictions on production across the board, from exploration and drilling, to refinery construction and expansion, to nuclear power plants, to electricity transmission, to the laying of new pipelines. And where virtually every new energy infrastructure project is delayed or stymied by litigation-happy “environmentalists.” And where special government tax brakes and subsidies to politically connected companies with the latest “alternative energy” scheme are rampant. And where productive companies who produce and supply the energy we need are lambasted and threatened with theft by taxation of “excess” profits earned through market prices, while other companies…utilities…enjoy legal monopoly status and guaranteed prices and profit margins while being protected from competition.

Not in finance, where the banking industry is protected from bankruptcy by a government central bank that controls the money supply, interest rates, reserve and margin requirements, etc., and then acts as lender of last resort. And where the Community Reinvestment Act “encourages” lenders to offer mortgages to “sub-prime” (i.e., low-income) borrowers based on “flexible [i.e., lower] underwriting standards.” And where those same lenders can then sell those mortgages into a market artificially inflated by two government created and backed corporations, Fannie and Freddie. Where excessive housing “investment” is encouraged by tax policy. And where sound, prudent banking is penalized while reckless, unscrupulous lending is encouraged because of federal deposit insurance and the “too big to fail” bailout policies.

Mr. Dionne is attacking a straw man. Capitalism and free markets don’t exist today, except in bits and pieces here and there. Massive government intervention and control in our lives now approaches or exceeds the elements of freedom that still exist. The original Founding principles of inalienable individual rights protected by government are all but forgotten. The minimal “pseudo-deregulation” of recent decades pales in comparison to the size and scope of government.

Attacking alleged “free market failures” without investigating the coercive government policies, regulations and controls, some of which trace back decades, that preceded them is a sham. Today, it is not the distorted and shackled free market remnants, but ever-growing government interventions in private economic decision-making that has failed. Yet, Mr. Dionne and other statists blame free market capitalism, then call for even wider government powers to close whatever “loopholes” of freedom still exist. Well, some of us are on to the game. It’s not hard to see where this is all leading. If our freedom means anything, it is those who use government power to “regulate” the productive activities of private citizens that needs a reality check.

7/13/2008 2:44:56 PM