Corporations and Rich Interests Created this Economic Mayhem

Today's must-read. A very good piece in the Washington Post by Steven Pearlstein, an intelligent writer about markets and money, and one who lives far enough from Wall Street not to be in thrall to it.

As I watch the stock market drop like a stone, again, fueled downward by panic selling by small investors, whose retirement will materialize or not depending on what happens in five minutes, and then zoom just as quickly upward, lightened by the absence of thousands of little people who got off at the bottom, I think of the "bounce effect".

The "bounce effect" is a term I invented to describe something I overheard on television: the "useful elimination of investors who have no business owning investments." Here I'm quoting a "market expert" explaining creative destruction on one of the television stock market programs. This was years ago now but it's happening again and worse than ever. The economy drops hard and bounces back up, without thousands, millions, of poor losers.

When bad things happen to little people, big people will explain why it's a good thing. Ever since Reagan restacked the deck against all little people in America we've had no explanation of the bad events except ones that let the big investors, the big market manipulators, the "market makers" off the hook.

This cannoning stock market and these three years of a bad economy are the lovechild of Wall Street and K Street. Americans need to begin asking their Republican representatives and their corporate bosses who pay for the Republican campaigns, "Is this the economy you wanted?" I believe it is. I believe they are privately very happy for most Americans to be fearful and impoverished because a worried workforce works harder for less, and a worried electorate is more obedient.

They are happy to impoverish the government because they hate it. Without a democratic government there is no one to boss them. Without government spending there is no spending right now, and no help for this economy. Meanwhile they are giddily tearing down useful institutions and replacing them with nothing. This is what revolutions are made of, only they are the revolutionaries and we are the innocent bystanders.

Handling a Manic-Depressive Economy

For half a century it was the successful policy of the U.S. government to moderate the moods of the economy, mostly to keep the economy from dropping into a depression, but also to keep it from overheating. To act as a thermostat. This required government to modulate markets, to soften the hardship and deprivation at the low end of the cycle and rein in the excess reward at the upper end––something it's much harder to do because the rich investor class has thousands of lobbyists working to keep the upper end from any moderation however rational. When there is excess pressure in one direction it's necessary to pull in the opposite direction. This is what keeps boats afloat and cars on the road.

COUNTERCYCLICAL. Try Googling that word and you don't come up with much. A few arcane economic articles available in PDF. One of the most important jobs of government is to counter the irregularities of the economy. Prior to the regulations inaugurated in the early 20th century the U.S. economy had catastrophic nationwide bank panics every few years. These panics ruined millions of people and threw millions more out of work, broke up families, bankrupted thousands of farms and businesses, saw towns dry up and disappear, and precipitated waves of suicide and child abandonment.

The veers and spikes of the economy allowed a few speculators to become enormously wealthy. Bubbles inflated and popped leaving millions in the hands of a few clever people. Sometimes the speculators precipitated the bubbles and the panics in order to profit from them. Regulation put an end to the worst predatory market behaviors and ushered in the long period of broad prosperity that characterized the best half century in American history. It was a bit boring, perhaps, but homeowners and families don't benefit from financial rollercoasters. The dismantling of those regulations in the years after Reagan took away or weakened the countercyclical tools of the federal government and ushered in poorer labor markets, more fluctuations, more bubbles, more Wall Street misbehavior and led to the near collapse of 2008-2009. If the government had a stronger hand we'd be recovering more broadly now, but Reaganism has concentrated the recovery at the top. We have a topheavy poorly balanced economy that is more unstable and less seaworthy.

Unregulated economies sometimes behave like those overloaded ferries that occasionally capsize in the straits of southeast Asia. When they become overweighted on one side, everyone rushes to the opposite side and the craft capsizes. In moments of imbalance the craft needs a counterbalance to remain afloat. In the economic context this is the job of government. To put weight on the side that everyone is rushing away from. To spend money when everyone is afraid to. To spend money in areas that are slack, on necessary infrastructure that has been neglected––even when there is a shortage of revenue to do so. That is a function only government can fulfill, because government works over longer spans of time and across broader areas. Government thinks in terms of economic climate patterns rather than the weather of the moment. Across the United States one year's drought will visit another region next year. Knitting smaller regional markets and different sectors together helps keep the broad economy afloat.

Government's job is to moderate the spikes and the depressions, to balance the interests of different sectors, and it's foolish to take that capability away. There is a name for that do-nothing philosophy. Herbert Hooverism. Government isn't the enemy in an economic crisis. As was seen in the worst weeks of the crisis, government is essential, and never more essential than when free markets fail. We need a better vocabulary for explaining this. A better set of descriptive models. The government is a sure hand on the steering wheel, a thermostat to keep the house livable summer and winter. The government is also fire and police and public health departments when things go wrong. But this countercyclical role of government, this balancing mechanism, is key and little discussed. It needs to be part of the public conversation. When no one is spending is the most important time for government to keep money flowing in the economy. Government is the only entity that can and will work in opposition to the frightened impulses that have us paralyzed. Countercyclical is a cumbersome word. Maybe we need a better one.