Walter Russell Mead lists ten lessons from the economic crisis:
2. Liberal capitalism works.
3. The rogue states are parasites.
4. The old left is dead.
5. Nobody really understands the world economy.
6. That goes double for financial markets.
7. The Battle of Financial Markets is over; the Battle of State Finance has begun.
8. The demographic crunch time is here.
9. Culture matters.
10. The politicization of economic governance is dangerous business.
Our chief problem, as I see it, is that our President and the Democratic Party in general have not learned even a single one of these lessons. They believe that the American Century is over; that liberal capitalism is a failure, and must yield to some form of socialism; that rogue states ought to be engaged and appeased; that the old left was essentially correct; that they understand the economy and financial markets well enough to direct them better than the marketplace; that the chief problem with State Finance is that we haven’t been spending enough on social programs; that the demographic crunch can be resolved with massive borrowing; that the culture of the English-speaking world must be apologized for and abandoned; and that politicians rather than economic agents should be making economic decisions. In fact, that strikes me as a fairly concise summary of Obama’s foreign and domestic impulses.
Mead analyzes the dangers, which run deep, and echoes Aristotle in his worry that democracy would eventually destroy itself:
The rise in the economic importance of the state during the twentieth century–however necessary and in many ways benign this role may have been at various points along the way–inevitably brings politicized governance and regulation in its wake in ways that make bubbles, panics and crashes both more destructive and more likely.
To take one important example, when government workers make up a substantial portion of the electorate, they can influence their own wages and pensions by voting as a bloc. They can — and they do. California, Illinois and Greece have a lot in common.
But even this is just the tip of the iceberg. The increased economic role of the state naturally and inevitably multiplies conflicts of interest and creates moral hazard.
After discussing the farm bubble induced by the Homestead Act that culminated in the Dust Bowl, and the housing incentives that culminated in our recent difficulties, he generalizes:
Yet it is clear that the mix of democracy and capitalism is a dangerous if necessary brew; after decades in which we failed to think the costs and risks through, we are now suffering the consequences of policies that create dangerously perverse incentives in both political and economic spheres. Reducing damaging but popular forms of state intervention in the economy while ensuring the state retains the authority and the ability to provide the effective legal and regulatory frameworks without which no modern economy can flourish is the fiendishly difficult and delicate task which Europeans and Americans alike must now undertake.
This is the problem Aristotle held to be insoluble. In the past, we managed it by way of Constitutional protections against redistributive policies. Since 1937, however, those Constitutional protections have largely been overthrown, and Obama’s court picks seem designed to gut them further or even turn them into mandates for redistribution. I don’t mean to be pessimistic; I think the problem does have a solution. My worry is that, maybe, we can’t get there from here.