McCain's Economic Phil-osophy

The "Phil" in Phil-osophy stands for Phil Gramm. Senator Phil Gramm (R-Texas, of course) was one of the authors of the financial deregulation of the late 1990s that has led to the financial crisis today. Gramm is also McCain's senior economic advisor, or rather he was until he said that Americans were a "nation of whiners" and he had to be quietly canned. Still, McCain repeates Gramm's phrases every day, including the idea that the "fundamentals of the economy are strong" and that we need "reform" of institutions. Reform, for Grammites, means more deregulation. So does "transparency." It all means the same thing: letting "the free market" do its thing. Regulation, to Grammites, means interference, and is always negative.

We could also call this Naivenomics. An Economics 101 understanding of the economy seems to underlie this view. It view the free market as if it were a perfect watch built by the Divine Watchmaker, and government as a constant drag and interference on that market. Government regulation creates inefficiencies. Just let the market be, these people argue, and prosperity will follow. It does generally follow, of course... for those wealthy few who advocate this Phil-osophy.

On this blog, we will battle about the extent of regulation, but most of us accept the basic premise that regulation is essential to the free market. In 1854, speaking of slavery in the Lincoln-Douglas debates, Douglas famously said that slavery could not last "a day or an hour" without government support. The same can be said of most of our financial sector. Without government and law, property and the economic system built around hypothecating and trading private property deteriorates and dies. I believe RBR was arguing something similar from Hernando DeSoto (not the first white man to find the Mississippi) that the rule of law was essential to economic devleopment.

Libertarians too will argue that all that is needed is to enforce the "natural" laws (basically: enforce contracts and punish property crimes). Most of us know that more is needed. Regulation for the economy is like regulation for your respiratory and circulatory system. It keeps you breathing. Right now, we have a financial system gasping for air (and breaking wind at the same time...).

The reasons why regulation is needed are, of course, complex, but the economic premise is relatively simple: the "free market" is a useful construct for some kinds of (mostly micro)economic analysis, but not a factual reality. Two forces have prevented government and the market from ever behaving as Libertarians or Grammites imagine. First, since time immemorial, powerful and wealthy interests have always leveraged government to their advantage. From the creation of the limited liability corporation (which allows investment without personal responsibility) to government spending (which alters market forces), the government has interfered on behalf of corporations and wealthy interests. The finger is always on the scale of moneyed interests. Second, since the New Deal, there has been a quiet political consensus in this country that economic situation for oridnary people must never again be allowed to get so bad as they did during the Great Depression. To do this, the process of "creative destruction" must be managed. The result, for better or worse, is that most sectors of our economy are dominated by huge institutions that are "too big to fail." Woe to those, like agriculture, that lack such institutions. They must derive benefit from "subsidies."

What this means is that private corporations get all the upside benefit, the public takes all the downside risk. For Phil Gramm, McCain, and others in the super-elite, this is fine. It's why they are Republicans and how they make lots of money. The rewards of success are private planes; the fruits of failure are golden parachutes. Republicans want the government to get the hell out of the way of anything that would interfere with the possibility of massive upside profits [for them] in bubbles and so forth, even if, by doing so, the public might be able to protect itself against shouldering the burden of the inevitable collapses. Indeed, Republicans even oppose taxing that massive wealth, although the people must pay for it on the other end. That's what Enron was all about a few years ago. We did this in the 1980s, and are going through it again. For a time, a few get very rich. Then it fails and those same people do not suffer: taxpayers and working people do.

Simply put, this is why we are in this mess. The solution is NOT, as some real hardliners say, to abandon the "too big to fail" policy. That would result only in more massive pain for ordinary people. The solution is for financial regulators to keep abreast of the economy and put on the brakes from time to time. This means that they must watch like hawks to beat down signs of the "moral hazard" created by a "too big to fail" economy.

And the support for this system ought to be through taxes on stock dividends, corporations, and so forth. The Republican philosophy that stock dividends and corporations should not be taxed at all looks even more outrageous in light of what is happening now.