Five Economic Lies

[For comment on breaking up corporate conglomerates, click here.]
1. The Obama Budget will move us toward “socialism” and away from private business
2. Big government deficits will destroy our economy
3. Relying on “big government” will destroy private markets
4. Government intervention will make us more like Europe
5. Government intervention in private markets breeds socialism
Conclusion
P.S. Breaking Up is Easy to Do

The Wall Street Journal, which loves Republicans and should know, says the Republican party’s popularity is “near an all-time low.” I wonder why. Could it be that the party’s simplistic ideology has destroyed our economy?

Republicans can explain every catastrophe wrought by true belief with a little sophistry, illogic and historical amnesia. Here are the top five lies and their refutation:

1. The Obama Budget will move us toward “socialism” and away from private business. False. America is a capitalist country, founded and reliant on free markets and private business. It was from the start, and it always will be.

But we have a long tradition of government helping private business by creating the conditions it needs to thrive. Those conditions include a modern, well-maintained infrastructure, sensible regulation and management of markets, and a robust system of universal public education.

Our government has always built or helped finance infrastructure for business and commerce. Its works include the Erie Canal, the locks and levees on the Mississippi, the transcontinental railways, the interstate highways, our air traffic control system, and the Internet, which started [Item 13] as a defense project funded and run by government.

The President just wants to continue that tradition. He wants to give us a modern transportation system not dependent on Mideast oil. He wants to make sure all of our kids are educated and can graduate from college without crushing debt. He wants us to have a modern clean-energy infrastructure and a health care system whose exploding costs don’t drive industry offshore, as they did consumer electronics and are doing with cars. He wants to manage and regulate markets so cataclysms like the subprime meltdown don’t happen again.

That’s not killing private business. It’s creating the conditions private business needs to thrive.

2. Big government deficits will destroy our economy. Wrong again. There are times when failing to invest heavily in corrective action or governmental necessity will destroy our economy. The Great Depression and the Second World War were among those times. Now is another.

Deficits that seem huge at the time become manageable as our economy recovers from adversity and grows. Eventually even scary deficits seem trivial.

So it was with the deficits of World War II. During the period 1943 - 1945, they reached a maximum of 33% of GDP, nearly three times our current maximum projected deficit. [Table 1.2, Page 23] Yet in real money they were less than $50 billion—a minuscule sum by today’s standards. [Table 1.1, Page 21]

Today we’ve already spent more on AIG alone. World War II’s deficits were scary at the time, but we quickly outgrew them as our economy recovered.

If we invest in industrial and market infrastructure, and if we correct the ideological excesses of the last forty years, our economic growth will one day dwarf today’s projected budget deficit, just as today’s ten-trillion dollar economy dwarfs the “scary” $50 billion deficits of World War II. But if we don’t invest and our economy stagnates or declines, we will never dig ourselves out of this hole.

3. Relying on “big government” will destroy private markets. This one is wrong on two counts. First, its implicit assumption is wrong. We’re not been relying on big government, especially compared to the last century. During World War II, deficits nearly reached a third of GDP. [Table 1.2, Page 23] For the war effort, the government nationalized (or built and owned) most basic industries, including autos (for tanks), steel, aircraft, rubber and aluminum. It even rationed basic commodities like gasoline and food: you had to give government bureaucrats little coupons to buy them even if you had money. (If you’re under 60, ask your parents or grandparents about rationing. They’ll remember.) Nothing like that is happening now or even planned.

Second, even the limited government interventions now proposed are temporary, just like the ones in World War II. As soon as World War II ended, the government sold private investors the industries it had taken over or built from scratch. The aluminum plants that it built for aircraft production, for example, became Kaiser and Reynolds Aluminum, private companies listed on the stock exchange. All this happened long before Ronald Reagan came along.

No one—least of all the President—has any designs on private enterprise. No one intends to “nationalize” anything, far less permanently. All the government will do is assert limited control needed to curb our financial meltdown and restore our economy. Then it will put markets and private business back in the forefront, just as Harry Truman did after FDR died, and just as Americans have always done.

There is no secret plan or desire to restrict private ownership of business or downsize private markets. The plan is to make business and markets more successful. If doing so requires the government to tread temporarily where no private investor will, practical people do what needs to be done.

4. Government intervention will make us more like Europe. Wrong again. We will never be like Europe, socially or economically. The reason is history. Today’s Europe arose from centuries of feudalism and monarchy. It had and still has hereditary lands, titles and “nobility.” We never had anything of the kind and never will. Our Constitution forbids hereditary titles. We don’t have any lords, barons, counts, or marquises, or any of their female counterparts. We are an egalitarian society.

But we do have dangerous trends that, in the long run, might make us look more like Europe. For several decades we have suffered increasing income inequality. Our once unmatched system of public education has decayed dramatically and is no longer internationally competitive. And we know that wealth follows education.

So if we don’t fix our disparities in income and education, our rich and their kids will continue to get richer and better educated in their private schools. The rest of us and their kids will get poorer, more ignorant, and therefore poorer still. If this vicious circle continues, we may yet create a durable upper class resembling the hereditary aristocracy of Europe. Far from bringing on social stratification and class warfare, intelligent investment in infrastructure and public education will keep them from happening here.

5. Government intervention in private markets breeds socialism. Oh, so wrong! Government intervention in private markets is what saved us from socialism.

About seventy years ago, our workers and their labor movements were flirting with socialism. At the same time, Russia and large parts of Europe were adopting socialism enthusiastically. (The term “Nazi,” for example, is a German acronym for “national socialist.”) What saved us from creeping socialism at home and dominant, muscular socialism abroad was the policies of FDR. He saved our economy and our capitalist system by creating jobs and widespread wealth. He did that by imposing intelligent regulation on businesses and markets and fostering collective bargaining of workers with management.

Under those policies, we escaped socialism and strengthened our capitalist system. We emerged from the turmoil and destruction of World War II with the world’s strongest and most socially cohesive economy. We have kept that leadership for sixty years.

How did we do it? With a “mixed” economy. We had robust private business and free markets. But we also had a robust government that kept business fair and honest and did what business can’t or won’t do.

Our economy is battered today because for forty years we starved our governmental sector, not our private one. We forgot the brilliant secrets of our mixed economy. We forgot history.

Conclusion

Republicans have led the charge in starving government. But twelve years of Democratic rule did nothing to change the trend. Jimmy Carter was a weak and unpopular president, unskilled in dealing with Congress. Bill Clinton achieved what little he did, and balanced the budget, by joining the trend, not fighting it. Until this very moment, no major national figure has recalled for us how our best days came out of both robust government and robust business.

The consequences encircle us. Now the government that deployed over 500,000 troops to save Kuwait can’t muster even 200,000 for Iraq and Afghanistan combined. Now the government that, among many other things, won World War II, built the atom bomb and the Internet, beat Yellow fever and polio, eradicated smallpox, and developed the world’s air traffic control and communications systems can’t even keep bridges from falling down or save an historic city from a hurricane.

If you’ve starved someone on whom you rely, you have to feed him again. Feeding a government that we’ve starved to emaciation for forty years is going to cost money.

But it’s a necessary expense. It’s not “socialism” or “big government.” It’s restoring balance and our winning hand—our mixed economy.

P.S. Breaking Up is Easy to Do

Every once in a while, a mainstream columnist hits the nail on the head with a perfect ring. David Ignatius’ Washington Post column today did just that.

Entitled “The Right Roosevelt?,” it argues that President Obama should emulate Teddy Roosevelt, not Franklin. Just as Teddy once “busted trusts,” Ignatius says, the Obama administration should break our hideously bloated corporate conglomerates into smaller, more manageable pieces, using bailout leverage to do so.

Ignatius focuses on financial giants like AIG and Citigroup, whose complex structures so defy analysis as to impair attempts to bail them out or even accurately to value them. He’s right on that count, as I’ve written before (1 and 2).

But the benefits of simplifying and streamlining business go way beyond finance. Just today the Wall Street Journal reported negatively on General Electric, one of our nation’s few remaining profitable industrial companies. The reason? Its unregulated finance arm is nearly as complex as Citigroup, and that arm is dragging down the whole. Why should an excellent industrial giant be investing in real estate in Eastern Europe, or in any financial business other than helping customers buy its industrial products?

GM is much the same. In applying for yet another government bailout, it has promised to jettison zombie brands, namely, Saturn, Pontiac, Saab, and Hummer. But wouldn’t it be better to spin off all viable brands as separate companies? Many like me would invest in the new Volt, and it wouldn’t be hard to find willing private investors in GM’s nimbler, smarter Cadillacs.

The last two decades saw an explosion of conglomeration in business. Much of it made and makes no sense. Unwinding it would not only improve financial transparency in bailouts. Breakups would also give investors clarity and certainty and younger, smarter, less tarnished executives a chance to show their stuff.

The antitrust laws that Teddy once used to break up the conglomerates of his day are blunt and tardy instruments. Today it takes years for a big antitrust case to work its way through our courts.

But our financial meltdown provides an opportunity in crisis. Every time a firm like AIG, Citigroup, or GM (or maybe soon GE) comes begging for a handout, the government should ask for a breakup plan. Then smaller, viable pieces could rise like Phoenixes from the ashes of conglomerate excess.

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