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A New Fault Line Among Liberals April 19, 2009

Posted by Dwight Furrow in Current Events, Dwight Furrow's Posts, Ethics, Political Philosophy, politics.
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Cross-posted at Reviving the Left

As the various debates regarding economic recovery are unfolding, an emerging fault line is developing among liberals regarding the nature of reform.

I think the fault line can best be described as follows: Are we trying to return the United States to levels of growth and consumption patterns prior to the Bush debacle, i.e. during the Clinton era? Treasury Secretary Tim Geithner seems want something like that. Or do we need a more substantial restructuring of the economy, as someone like Paul Krugman would endorse? Should we preserve the goal of increasing levels of homeownership and robust consumerism through expanding credit and financial services, albeit with more effective regulation. Or is the idea of an economy based on easy credit, mass ownership of stocks, homes, and other investment vehicles, and dominated by the financial sector a bad idea?

Will an economy consumed with the pursuit of wealth always be subject to bubbles, gross inequality, and instability caused by excessive greed, regardless of the regulations we put in place?

On the surface these may appear to be purely economic questions. But in fact there is a moral dimension.

It is hard to see how a society based on wheeling and dealing could be anything but a society in which selfishness rules. Norms and virtues inevitably flow from our activity—we become what we do. When wealth acquisition is the measure of a person there is no natural limit to the temptation to acquire more. And because wealth begets wealth conferring a competitive advantage on the already wealthy, most people will in end be unable to compete and will fall by the wayside, like the bankrupt homeowners who window-shop at the malls today. Meanwhile, the wheeler dealers will always find a way to outwit regulators, who will be resented by everyone whose aspirations outstrip reality—most of us.

So I don’t think a return to Clinton era prosperity is quite the way to go. Getting more and more people into the middle and upper middle class is a worthy aspiration, but trying to expand the pie through cheap tricks won’t get us there.

The downside of more significant reforms, however, is less growth. And that is not a good thing. Maybe we should be willing to forgo the new wardrobe, hold on to a car for 5 years, and stick with last year’s cell phone technology. But what about the people who design, make, and sell clothes, cars, and cell phones? Slower growth means more unemployment, less opportunity, and these are moral issues as well because they entail suffering.

I don’t think we have to choose between growth and contraction. But we will have to re-describe the nature of wealth. The kind of wealth we have sought to create over the past 30 years was private wealth. And the excessive pursuit of private wealth inevitably leads to the greedy melee that we are still trying to disentangle.

But if we define wealth more broadly in term of social capital—better education, health care, transportation, a clean environment, higher levels of trust—we can pursue rampant growth and keep people well employed without creating lots of Bernie Madoffs in the process.



Geithner’s Plan: Getting the Values Right March 22, 2009

Posted by Dwight Furrow in Current Events, Dwight Furrow's Posts, Ethics.
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Treasury Secretary Tim Geithner’s plan to rescue the banking system is due to be released today. Details of the plan have been leaking all weekend, and it should come as no surprise that there is no consensus among economists (or at least the one’s I read) on whether it is a good plan or not.

Paul Krugman called the plan “an awful mess”

But it’s immediately obvious, if you think about it, that these funds will have skewed incentives… For the private investors, this is an open invitation to play heads I win, tails the taxpayers lose. So sure, these investors will be ready to pay high prices for toxic waste. After all, the stuff might be worth something; and if it isn’t, that’s someone else’s problem.

But Brad Delong is more smitten:

So why do I have a positive and Paul a negative view of the Geithner Plan? I see three reasons:

1. The half empty-half full factor: I see the Geithner Plan as a positive step from where we are. Paul sees it as an embarrassingly inadequate bandaid.

2. Politics: I think Obama has to demonstrate that he has exhausted all other options before he has a prayer of getting Voinovich to vote to close debate on a bank nationalization bill. Paul thinks that the longer Obama delays proposing bank nationalization the lower it’s chances become.

3. I think the private-sector players in financial markets right now are highly risk averse–hence assets are undervalued from the perspective of a society or a government that is less risk averse. Paul judges that assets have low values because they are unlikely to pay out much cash.

In fact, Delong’s entire FAQ is worth reading if you want a brief, clearly written analysis of the plan.

I’m not an economist so dear reader beware. But, as I sort through the various opinions of economists, it seems to me some of the disagreement is about values, not technical economic issues.

Some people emphasize the fact that this scheme throws more taxpayer money at the same dingbat scumbags who got us into this mess. The government will insure overpriced assets that will have little value in the future, and we will end up once again rewarding investors for their bad bets. This is fundamentally unfair and unjust. These folks don’t like the plan.

Others emphasize the chance that this plan will get the bad assets off the bank ledgers and encourage more lending, giving consumers more buying power and firms less reason to lay off workers, thereby (hopefully) stanching economic decline. These folks like the plan a lot more.

I think both sides are right on the economics. It seems to me that there is plenty of incentive for investors to buy these assets since the government will limit their losses if they go bad. That is good and should provide further stimulus to the economy. They also have an incentive to bid up the price of the assets since they don’t have to put a lot money on the table to acquire them. That is bad because undoubtedly the taxpayers will have to pay up.

No one knows if this will work or not, and my economics crystal ball shattered many decades ago. But the moral philosopher in me would rather sacrifice a little justice and fairness to avoid the misery that a prolonged recession (or worse) entails. So independently of the economic issues, I think the administration gets the value question right.