Republicans Need to Save Capitalism

Democrats have gone left, so they’re not going to do it. The GOP needs a renewed seriousness.

.. Pew Research sees the party lurching to the left since 2009; Gallup says the percentage of Democrats calling themselves liberal has jumped 23 points since 2000. But you don’t need polls. More than 70 Democrats in the House, and a dozen in the Senate, have signed on to the Green New Deal, an extreme-to-the-point-of-absurdist plan that is yet serious

Millennials, the biggest voting-age bloc in America, are to the left of the generations before them. Moderates are aging out. The progressives are young and will give their lives to politics: It’s all they’ve ever known. It is a mistake to dismiss their leaders as goofballs who’ll soon fall off the stage. They may or may not, but those who support and surround them are serious ideologues who mean to own the future.

None of this feels like a passing phase. It feels like the outline of a great political struggle that will be fought over the next 10 years or more.

.. The American establishment had to come to look very, very bad. Two long unwon wars destroyed the GOP’s reputation for sobriety in foreign affairs, and the 2008 crash cratered its reputation for economic probity. Both disasters gave those inclined to turn from the status quo inspiration and arguments. Culturally, 2008 was especially resonant: The government bailed out its buddies and threw no one in jail, and the capitalists failed to defend the system that made them rich. They dummied up, hunkered down and waited for it to pass.

Americans have long sort of accepted a kind of deal regarding leadership by various elites and establishments. The agreement was that if the elites more or less play by the rules, protect the integrity of the system, and care about the people, they can have their mansions. But when you begin to perceive that the great and mighty are not necessarily on your side, when they show no particular sense of responsibility to their fellow citizens, all bets are off. The compact is broken: They no longer get to have their mansions. They no longer get to be “the rich.”

For most of the 20th century the poor in America didn’t hate the rich for their mansions; they wanted a mansion and thought they could get one if things turned their way. When you think the system’s rigged, your attitude changes.

On the right the same wars, the same crash, and a different aspect. In the great issue of the 2016 campaign it became unmistakably clear that the GOP elite did not care in the least how the working class experienced immigration. The party already worried too much about border security—that’s the lesson the elites took from Mitt Romney’s loss in 2012, according to their famous autopsy. They appeared to look after their own needs, their own reputations: We’re not racist like people who worry about the border! They were, as I’ve written, the protected, who looked down on those with rougher lives. The unprotected noticed, and began to sunder their relationship with establishments and elites.

Donald Trump came of that sundering. He was the perfect insult thrown in the establishment’s face. You’re such losers we’re hiring a reality-TV star to take your place. He’ll be better than you.

Conservatives regularly attend symposia to discuss the future of conservatism. Republicans in Washington stumble around trying to figure what to stand for beyond capitalizing on whatever zany thing some socialist said today.

But isn’t their historical purpose clear? Their job—now and in the coming decade—is, in a supple, clever and concerted way, to save the free-market system from those who would dismantle it. It is to preserve and defend the capitalism that made America a great thing in the world and that, for all its flaws and inequities, created and spread stupendous wealth. The natural job of conservatives is to conserve, in this case that great system.

I’ll go whole hog here. We need a cleaned-up capitalism, not a weary, sighing, acceptance-of-man’s-fallen-nature capitalism. Republicans and conservatives need a more capacious sense of what is needed in America now, including what their own voters need. The party needs a tax-and-spending reality that takes into account an understandable and prevalent mood of great need. They need to be moderate, peaceable and tactful on social issues, but firm, too. This is where the left really is insane: As the earnest, dimwitted governor of Virginia thoughtfully pointed out, they do allow the full-term baby to be born, then make it comfortable as they debate whether it should be allowed to take its first breath or quietly expire on the table. A party that can’t stand up against that doesn’t deserve to exist.

All this must be done with a sense of how Americans on the ground are seeing things. What they see all around them cultural catastrophe—drugs, the decline of faith, the splintering of all norms by which they’d lived, schools that don’t teach and that leave their kids with a generalized anxiety. They want more help to deal with this. If you said, “We’re going to have a national program to help our boys become good men,” they would be for it, they would cheer. If you said, “We’re going to get serious and apply brains and money to what we all know is a mental-health crisis in America,” they wouldn’t care about the cost—and they’d be right not to care. They think as a people we’ve changed, our character has changed, and this dims our future. Make things better on the ground now and we’ll figure out the rest later.

The Hollowing Out of the G20

Since helping to mitigate the global financial crisis, the G20 has degenerated from a platform for action to a forum for discussion. In the age of Donald Trump, it could sink even further, becoming a vehicle for legitimating illegal behavior, from Russia’s aggression in Ukraine to Saudi Arabia’s murder of a journalist.

.. Now, instead of jostling for pictures of Trump and Xi, the world’s media will be dissecting interactions between MBS, accused of ordering the brutal torture and murder of the US-based Saudi journalist Jamal Khashoggi in the Saudi consulate in Istanbul, and Turkish President Recep Tayyip Erdoğan. Those between Russian President Vladimir Putin with German Chancellor Angela Merkel – which would have been uncomfortable even without the recent attack on Ukraine – will also be heavily scrutinized.
.. None of this is the point of a G20 summit. What used to be an effective forum of global governance has now degenerated into a kind of Kabuki theater – a faithful reflection of the extent to which the global order has lost its way.
.. After the global financial crisis erupted in 2008, the G20 acted as an international crisis committee, mitigating the disaster by injecting liquidity into markets worldwide. The effectiveness of the G20’s 2008 and 2009 summits raised hopes that, at a time of rapid change, this emerging platform, comprising economies accounting for 85% of world output, could serve as a global fire brigade. Not bound by procedural rules or legal strictures, the G20 could respond quickly when needed. There was even talk of the G20 intervening in a wider range of areas, potentially even eclipsing the United Nations Security Council.

From Economic Crisis to World War III

The response to the 2008 economic crisis has relied far too much on monetary stimulus, in the form of quantitative easing and near-zero (or even negative) interest rates, and included far too little structural reform. This means that the next crisis could come soon – and pave the way for a large-scale military conflict.

BEIJING – The next economic crisis is closer than you think. But what you should really worry about is what comes after: in the current social, political, and technological landscape, a prolonged economic crisis, combined with rising income inequality, could well escalate into a major global military conflict.

The 2008-09 global financial crisis almost bankrupted governments and caused systemic collapse. Policymakers managed to pull the global economy back from the brink, using massive monetary stimulus, including quantitative easing and near-zero (or even negative) interest rates.

But monetary stimulus is like an adrenaline shot to jump-start an arrested heart; it can revive the patient, but it does nothing to cure the disease. Treating a sick economy requires structural reforms, which can cover everything from financial and labor markets to tax systems, fertility patterns, and education policies.

Policymakers have utterly failed to pursue such reforms, despite promising to do so. Instead, they have remained preoccupied with politics. From Italy to Germany, forming and sustaining governments now seems to take more time than actual governing. And Greece, for example, has relied on money from international creditors to keep its head (barely) above water, rather than genuinely reforming its pension system or improving its business environment.

The lack of structural reform has meant that the unprecedented excess liquidity that central banks injected into their economies was not allocated to its most efficient uses. Instead, it raised global asset prices to levels even higher than those prevailing before 2008.

In the United States, housing prices are now 8% higher than they were at the peak of the property bubble in 2006, according to the property website Zillow. The price-to-earnings (CAPE) ratio, which measures whether stock-market prices are within a reasonable range, is now higher than it was both in 2008 and at the start of the Great Depression in 1929.

As monetary tightening reveals the vulnerabilities in the real economy, the collapse of asset-price bubbles will trigger another economic crisis – one that could be even more severe than the last, because we have built up a tolerance to our strongest macroeconomic medications. A decade of regular adrenaline shots, in the form of ultra-low interest rates and unconventional monetary policies, has severely depleted their power to stabilize and stimulate the economy.

If history is any guide, the consequences of this mistake could extend far beyond the economy. According to Harvard’s Benjamin Friedman, prolonged periods of economic distress have been characterized also by public antipathy toward minority groups or foreign countries – attitudes that can help to fuel unrest, terrorism, or even war.

For example, during the Great Depression, US President Herbert Hoover signed the 1930 Smoot-Hawley Tariff Act, intended to protect American workers and farmers from foreign competition. In the subsequent five years, global trade shrank by two-thirds. Within a decade, World War II had begun.

To be sure, WWII, like World War I, was caused by a multitude of factors; there is no standard path to war. But there is reason to believe that high levels of inequality can play a significant role in stoking conflict.

According to research by the economist Thomas Piketty, a spike in income inequality is often followed by a great crisis. Income inequality then declines for a while, before rising again, until a new peak – and a new disaster.

This is all the more worrying in view of the numerous other factors stoking social unrest and diplomatic tension, including

  • technological disruption, a
  • record-breaking migration crisis,
  • anxiety over globalization,
  • political polarization, and
  • rising nationalism.

All are symptoms of failed policies that could turn out to be trigger points for a future crisis.

.. Voters have good reason to be frustrated, but the emotionally appealing populists to whom they are increasingly giving their support are offering ill-advised solutions that will only make matters worse. For example, despite the world’s unprecedented interconnectedness, multilateralism is increasingly being eschewed, as countries – most notably, Donald Trump’s US – pursue unilateral, isolationist policies. Meanwhile, proxy wars are raging in Syria and Yemen.

Against this background, we must take seriously the possibility that the next economic crisis could lead to a large-scale military confrontation. By the logicof the political scientist Samuel Huntington , considering such a scenario could help us avoid it, because it would force us to take action. In this case, the key will be for policymakers to pursue the structural reforms that they have long promised, while replacing finger-pointing and antagonism with a sensible and respectful global dialogue. The alternative may well be global conflagration.

Self-Fulfilling Financial Crises

Many mistaken assumptions about the 2008 financial crisis remain in circulation. As long as policymakers believe the crisis was rooted in the housing bubble rather than human psychology, another crisis will be inevitable.

.. Recall that by mid-2008, home prices had returned to, or even fallen below, levels supported by their underlying fundamentals, and employment and production in the residential construction industry had declined to levels far below trend. The work of rebalancing asset valuations and reallocating economic resources across sectors had already been accomplished.
.. To be sure, there still would have been around $750 billion worth of financial-asset losses in the form of defaults on subprime mortgages and home-equity loans. But that is only one-quarter of what global equity markets lost in seven hours on October 19, 1987. In other words, it would not have been enough to sink the global financial system.
.. Ben Bernanke, then Chair of the US Federal Reserve, seemed confident in the summer of 2008 that the correction in housing prices had not triggered any unmanageable financial crisis. At the time, he was mainly focused on the dangers of rising inflation.
.. And then the bottom fell out. The reason, Gennaioli and Shleifer show, is that beliefs changed.
  • Investors came to believe that financial markets were saddled with highly elevated risk, owing to a number of factors.
  • The interbank market had seized up,
  • homeowners were defaulting on their mortgages,
  • Bear Stearns had collapsed,
  • the US Treasury had intervened to rein in Freddie Mac and Fannie Mae, and, above all,
  • Lehman Brothers had declared bankruptcy.
.. All of this led to the sudden run on both the shadow and non-shadow banking systems, as investors scrambled to dump assets. The increased risk that they had imputed to the system became a reality.
.. And yet nothing about the fallout from the crisis was inevitable. Had the Fed been in possession of contingency plans for putting too-big-to-fail institutions into receivership and becoming the risk-bearer of last resort, we would probably be living in a very different world today.
.. Gennaioli and Shleifer’s second important contribution is to show that “crises of beliefs” like the one that precipitated the disaster of 2008-2009 are deeply rooted in human psychology, so much so that we will never be free of them.
.. Crises of belief are manifestations of a chronic condition that must be managed.
.. When fundamental beliefs have shifted permanently, one should not expect the same policy mix that supported full employment, low inflation, and balanced growth before the crisis to do so afterwards.
.. For a decade now, people have been looking for a silver lining to the disasters of 2008-2018, hoping that this period will bring about a more productive integration of finance, behavioral economics, and macroeconomic orthodoxy. So far, they have been searching in vain. But with the publication of A Crisis of Beliefs, there is hope yet.