|“Living within one’s means” is an appealing but oversimplified metaphor. Before the crisis, some families and nations did borrow to finance consumption—a good definition of living beyond one’s means. But this borrowing was not the prime cause of the crisis. Today, far larger numbers of entirely prudent people find themselves with diminished means as a result of broader circumstances beyond their control, and bad policies compound the problem.
After a general collapse, one’s means are influenced by whether the economy is growing or shrinking. If I am out of work, with depleted income, almost any normal expenditure is beyond my means. If my lack of a job throws you out of work, soon you are living beyond your means, too, and the whole economy cascades downward. In an already depressed economy, demanding that we all live within our (depleted) means can further reduce everyone’s means. If you put an entire nation under a rigid austerity regime, its capacity for economic growth is crippled. Even creditors will eventually suffer from the distress and social chaos that follow.
Take a closer look at moral hazard ex ante from ex post and you will find that blame is widely attributed to the wrong immoralists. Governments and families are being asked to accept austerity for the common good. Yet the prime movers of the crisis were bankers who incurred massive debts in order to pursue speculative activities. The weak reforms to date have not changed the incentives for excessively risky banker behaviors, which persist.
The best cure for moral hazard is the proverbial ounce of prevention. Moral hazard was rampant in the run-up to the crash because the financial industry was allowed to make wildly speculative bets and to pass along risks to the rest of the society. Yet in its aftermath, this financial crisis is being treated more as an object lesson in personal improvidence than as a case for drastic financial reform.
The last great financial collapse, by contrast, transformed America’s economics. First, however, the Roosevelt administration needed to transform politics. FDR’s reforms during the Great Depression constrained both the financial abuses that caused the crash of 1929 and the political power of Wall Street. Deficit-financed public spending under the New Deal restored growth rates but did not eliminate joblessness. The much larger spending of World War II—with deficits averaging 26 percent of gross domestic product for each of the four war years—finally brought the economy back to full employment, setting the stage for the postwar recovery.
By the war’s end, the U.S. government’s public debt exceeded 120 per- cent of GDP, almost twice today’s ratio. America worked off that debt not by tightening its belt but by liberating the economy’s potential. In 1945, there was no panel like President Obama’s Bowles-Simpson commission targeting the debt ratio a decade into the future and commending ten years of budget cuts. Rather, the greater worry was that absent the stimulus of war and with twelve million newly jobless GIs returning home, the civilian economy would revert to depression. So America doubled down on its public investments with programs like the GI Bill and the Marshall Plan. For three decades, the economy grew faster than the debt, and the debt dwindled to less than 30 percent of GDP. Finance was well regulated so that there was no speculation in the public debt.
Blast from the Past. At Daily Kos on this date in 2009—Gallup: Moderates, liberals flee GOP:
|Gallup is out with an interesting new survey showing where the Republican Party has lost the most ground over the past eight years, and conservatives aren't going to like what it reveals.
The narrative spun by the Rush Limbaughs and Sean Hannitys and Dick Cheneys of the world is that the GOP's problem is that it hasn't been conservative enough, and that rather than moderate its policies, the GOP should focus its rebuilding efforts on the party's conservative base.
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