Sunday Morning Coming Down

Tyler Cowen's column in the NY Times is today's must-read: "Too Big To Take a Pay Cut"

FOR years now, many businesses and individuals in the United States have been relying on the power of government, rather than competition in the marketplace, to increase their wealth. This is politicization of the economy. It made the financial crisis much worse, and the trend is accelerating.

Well before the financial crisis erupted, policy makers treated homeowners as a protected political class and gave mortgage-backed securities privileged regulatory treatment. Furthermore, they allowed and encouraged high leverage and the expectation of bailouts for creditors, which had been practiced numerous times, including the precedent of Long-Term Capital Management in 1998. Without these mistakes, the economy would not have been so invested in leverage and real estate and the financial crisis would have been much milder.

But we are now injecting politics ever more deeply into the American economy, whether it be in finance or in sectors like health care. Not only have we failed to learn from our mistakes, but also we’re repeating them on an ever-larger scale.

But, don't take my word for it; just read the d*** thing!

A big problem is this: there are very few people holding elective office today who truly believe that less is more in the economic sphere. Yes, I am including many GOP politicos in that group. Many of the loudly trumpeted bits of "deregulation" that occurred in the last decade were half-measures that benefited a few insiders at the expense of the rest of us. Just look at the millions Enron earned off of CA's short experiment with deregulation of the utilities, which resulted in: rolling brown-outs, aging infrasctructure, and Enron traders gloating about ripping off Grandma. Plus, we still have PG&E as our sole source of electricty an gas in our homes! The GOP Congress added a new Medicare entitlement and increased pork-barrel spending that mostly seemed to benefit the usual bunch of back-slapping businessmen who benefit from the intersection of Big Business and Big Government. Etc.

Reading about economic debates in the 19th century, it's funny to see how the advocates of government intrusion had to argue against the Constitution, especially during the notorious Lochner-era (the end of which was the object of FDR's court packing scheme). Now, it's the other way around. Those arguing for limited government in the economy must argue in the face of political arrangements and practices that have been the default setting for American politics for 80+ years.