Wednesday, January 26, 2011

State of the Union

Yesterday, I happened to catch most of the Republican response to the SOTU speech. One thing I found fascinating was the series of myths that continued to be utilized as if they were unquestionable truths. The first was the rather obvious, and reported, reference to the cost of the healthcare reform package -- which appears to actually cut the deficit, not increase it. But the much more important mythology revolves around an ideology that continues to be promoted as if it is received truth -- essentially that government is the problem and markets the solution. Even after the latest financial crisis, and the fact that unemployment and foreclosures remain high, there appears to be a general belief among conservatives (and unfortunately a more center-right post-mid term election Obama administration) that we must now deal with the deficit and long term debt over working to stimulate the economy in any way. This belief, which stands in stark contradiction to sensible analysis of the causes of the crisis including financial deregulation, poor risk management and lack of effective oversight, essentially argues that more of the same will save us. It is backed by two rather absurd assumptions: 1. The stimulus did nothing to help the recovery, but rather hindered it (an argument completely unsupported by any credible economists) and 2. Somehow the crisis accelerated under Obama. The rewriting of history is a popular modern political strategy for both parties, but conservatives have come to assume a public that has the memory of Leonard in the 2000 movie Memento. And they seem right. Ryan appeared to argue last night that Obama took a small financial mess and made it into a full-blown crisis, a ridiculous claim that stretches the edges of credulity, if similar arguments haven't been used effectively for years. Remember that surplus we had when Bush entered office; that never happened. Remember those weapons of mass destruction we never found -- well we went in there to spread democracy and freedom anyway.

The most troubling aspect of the new common sense to me is the complete lack of empirical evidence to support their claims. Economic research tends to show that government intervention, while it may lower profitability and technological advancement in the short run (in some cases), tends to reduce inequality, lessen the magnitude and frequency of financial crises and lead to more robust and sustained growth. That is exactly the case in the BRIC countries today -- and the model used by not only China but the four tigers to grow rapidly over the past decades (irrespective of their financial crisis of 1997-8). It is also worth noting that it was the model employed by the United States, with the federal government subsidizing new technology and strategic goods, placing barriers to trade that helped these nascent ("or infant") industries grow and helped maintain comparative advantages to this day in international trade arrangements. While America has always been fearful of the dangers of excessive government power (as they should be), there is also the fear of excessive corporate and financial market power that should now be thought of in a similar light. Is tyranny of the market really that different than the tyranny of a crazy King who doesn't care much for a colony across an ocean? Can we really trust those ideas and people that got us into this mess to get us out, particularly if they plan to just give us more of the same? When (if ever) will a real populist movement emerge to challenge this myopic view?

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