Sunday Times (London)
October 4, 2009
by Irwin Stelzer
A funny thing happened on the way to the collapse of market capitalism in the face of the worst economic crisis since the Great Depression. It didn’t. Indeed, in Germany voters relieved Chancellor Angela Merkel of the necessity of cohabiting with a left-wing party, allowing her to form a coalition with a party favouring lower taxes and free markets. And in Pittsburgh leaders representing more than 90% of the world’s GDP convened to figure out how to make markets work better, rather than to hoist the red flag. The workers are to be relieved, not of their chains, but of credit-card terms that are excessively onerous, and helped to retain their private property — their homes.
All of this is contrary to expectations. The communist spectre that Karl Marx confidently predicted would be haunting Europe is instead haunting Europe’s left-wing parties, with even Vladimir Putin seeking to attract investment by re-privatising the firms he snatched. Which raises an interesting question: why haven’t the economic turmoil and rising unemployment led workers to the barricades, instead of to their bankers to renegotiate their mortgages?
It might be because Spain’s leftish government has proved less able to cope with economic collapse than countries with more centrist governments. Or because Britain, with a leftish government, is now the sick man of Europe, its financial sector in intensive care, its recovery likely to be the slowest in Europe, its prime credit rating threatened. Or it might be because left-wing trade unions, greedily demanding their public-sector members be exempted from the pain they want others to share, have lost their credibility and ability to lead a leftward lurch.
All of those factors contribute to the unexpected strength of the right in a world in which a record number of families are being tossed out of their homes, and jobs have been disappearing by the million. But even more important in promoting reform over revolution are three factors: the existence of democratic institutions; the condition of the unemployed; and the set of policies developed to cope with the recession.
Democratic institutions give the aggrieved an outlet for their discontent, and hope that they can change conditions they deem unsatisfactory. Don’t like the way George W Bush has skewed income distribution, toss the Republicans out and elect a man who promises to tax the rich more heavily. Don’t like Gordon Brown’s tax increases, toss him out and hope the Tories mean it when they promise at least to try to lower taxes. Result: angry voters but no rioters, unless one counts the nutters who break windows at McDonald’s or storm banks in the City. Contrast that with China, where the disaffected have no choice but to take to the streets. Result: an estimated 10,000 riots this year protesting against job losses, arbitrary taxes, and corruption.
A second factor explaining the left’s inability to profit from economic suffering is capitalism’s ability to adapt, demonstrated in the Great Depression of the 1930s. While a gaggle of bankers and fiscal conservatives held out for the status quo, Franklin D Roosevelt and his experimenters began to weave a social safety net. In Britain, William Beveridge produced a report setting the stage for a similar, indeed stronger, net. Continental countries recovering from the second world war did the same. So unemployment no longer dooms a worker to close-to-starvation. Yes, civic institutions were able to soften the blow for the unemployed before the safety net was put in place, but they could not cope with pervasive protracted lay-offs.
Also, during this and other recessions, when prices for many items are coming down, the real living standard of those in work actually improves. In America, somewhere between 85% and 90% of workers have kept their jobs, and now see their living costs declining as rents and other prices come down. So the impetus to take to the streets is limited.
Then there are the steps taken by capitalist governments to limit the depth and duration of the downturn. As the economies of most of the big industrial countries imploded, policy went through two phases. The first was triage — do what is necessary to prevent the financial system from collapse. Spend. Guarantee deposits to prevent runs on banks and money funds, bail out big banks, force relatively healthier institutions to take over sicker ones, mix all of this with rhetorical attacks on greedy bankers — the populist spoonful of sugar that made the bailouts go down with the voters — and stop the rot.
Meanwhile, have the central banks dust off their dog-eared copies of Bagehot and inject lots of liquidity by whatever means comes to mind. John Maynard Keynes, meet Milton Friedman for a cordial handshake.
Then came more permanent reform, another round of adapting capitalism to new realities, in this case the malfunctioning of the financial markets. Even Barack Obama’s left-wing administration decided not to scupper the markets but instead to develop rules to relate bankers’ pay more closely to long-term performance; to reduce the chance of implosions by increasing the capital banks must hold, cutting their profits and dividends, but leaving them in private hands; and to channel most stimulus spending through private-sector companies.
This leaves the anti-market crowd little room for manoeuvre as voters seem satisfied with the changes to make capitalism and markets work better and more equitably. At least, so far.
There are exceptions. Australia moved a bit to the left in the last election, but more out of unhappiness with a tired incumbent’s environmental and foreign policy. Americans chose Obama, but he had promised to govern from the centre before swinging left. And for all his rhetorical attacks on greedy bankers and other malefactors of great wealth, sticks to reform of markets rather than their replacement, with healthcare a possible exception. Even in these countries, so far, so good for reformed capitalism. No substitutes accepted.
Irwin Stelzer is a Senior Fellow and Director of Economic Policy Studies for the Hudson Institute. He is also the U.S. economist and political columnist for The Sunday Times (London) and The Courier Mail (Australia), a columnist for The New York Post, and an honorary fellow of the Centre for Socio-Legal Studies for Wolfson College at Oxford University. He is the founder and former president of National Economic Research Associates and a consultant to several U.S. and United Kingdom industries on a variety of commercial and policy issues. He has a doctorate in economics from Cornell University and has taught at institutions such as Cornell, the University of Connecticut, New York University, and Nuffield College, Oxford.
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