On the Simultaneous Necessity and Impossibility of Deeper Analysis of the Speculative Economy
posted by Frank Pasquale
I’ll be off the blog the next week or so finishing a book chapter and doing a conference. But I wanted to make one final note on the blitzkrieg bailout bill.
This bailout has people all over the ideological spectrum feeling queasy. Conservative republicans call it socialism; progressives are deeming it crony capitalism at its worst. It may well end up being none of these things, if it is well-administered and we follow something akin to the Swedish model of demanding equity stakes in the bailed out companies (and here’s another possible precedent). However, the fire-drill manner in which we’re doing this inevitably brings to mind Chris Hoofnagle’s dark portrait of deregulationism in The Denialist Deck of Cards–the sinking feeling that power brokers will tell us “there’s no need for regulation” when times are good, and “no time to figure out good regulation” when the inevitable emergency materializes.
But even more disheartening to me is the fact that we may be missing an opportunity to fundamentally rethink how we measure the performance of the economy.
Consider this squib from Jeffrey Sachs, calling on the government to “bailout the poor:”
The UN meetings [this week] were abuzz that the US could find $700bn for a bail-out of its corrupt and errant banks but couldn’t find a small fraction of that for the world’s poor and dying. It didn’t make sense to the world community. The puzzlement was all the greater since the very banks being bailed out so generously had awarded themselves more than $30bn in bonuses early this year, roughly the world’s entire aid budget for 800m people in sub-Saharan Africa.
And here’s a perspective from Joshua Holland:
[T]he powerhouses of the global economy — the United States, Europe, Japan and the “Asian Tigers” — have given woefully low priority to economic development in the rest of the world. They’ve essentially relegated it to NGOs and an underfunded United Nations. . . .That’s left much of the rest of the world’s population (and this includes people in the wealthiest countries as well as the poorest) with barely enough money to feed their families, much less buy [other goods].
According to the UN, 80 percent of the people on the planet live on $10 dollars a day or less, and they’re not going to take many flights on Boeing’s shiny new airplane, buy GE’s dishwashers or use Nortel’s broadband. Over just the past two years, the number of people living on the “edge of emergency” — in imminent danger of starvation or death from disease epidemics — has doubled, zooming from 110 million people to 220 million.
I fully expect that this bailout will be funded (at least in part) with more loans from China. How does that money accumulate? When you look underneath the glittering skyscrapers in Hong Kong and Shanghai, the distributive realities are not that pretty:
China’s savings rate is a staggering 50 percent, which is probably unprecedented in any country in peacetime. This doesn’t mean that the average family is saving half of its earnings—though the personal savings rate in China is also very high. . . . China’s government imposes an unbelievably high savings rate on its people. The result, while very complicated, is to keep the buying power earned through China’s exports out of the hands of Chinese consumers as a whole. . . .
[W]hy is China shipping its money to America? An economist would describe the oddity by saying that China has by far the highest national savings in the world. This sounds admirable, but when taken to an extreme—as in China—it indicates an economy out of sync with the rest of the world, and one that is deliberately keeping its own people’s living standards lower than they could be. For comparison, India’s savings rate is about 25 percent, which in effect means that India’s people consume 75 percent of what they collectively produce. . . . Recently, America’s has at times been below zero, which means that it consumes, via imports, more than it makes.
China as a whole is unbelievably short on many of the things that qualify countries as fully developed. Shanghai has about the same climate as Washington, D.C.—and its public schools have no heating. (Go to a classroom when it’s cold, and you’ll see 40 children, all in their winter jackets, their breath forming clouds in the air.) Beijing is more like Boston. On winter nights, thousands of people mass along the curbsides of major thoroughfares, enduring long waits and fighting their way onto hopelessly overcrowded public buses that then spend hours stuck on jammed roads. And these are the showcase cities!
I fear that the more deeply one contemplates these flows of money, the more worried one has to be a) about their long (or even medium-) term stability, b) the fairness of it, and c) the authoritarian foundations (in China) of a go-go, free market economy in the US. Real wages have declined over the past 7 years (even as productivity has gone up), and that gap has largely been “made up for” in borrowing. That borrowing is in turn largely predicated on the forced savings of tens of millions of Chinese.
So in the end, we may pride ourselves on a bailout that keeps credit flowing by propping up a private banking system. But that privatization of our collective priorities (consider how unthinkable a $700 bn health care bailout, or school bailout, or infrastructure bailout would be) is merely a mirage of the Hayekian ideal of bottom-up, atomistic decisionmaking. Yes, individual banks and citizens will get to decide on whether to buy SUV’s, rather than having some “authoritarian” intervention to improve public transit. But the credit that makes that possible may well represent a mortgaging of our collective future to some of the most authoritarian regimes on earth.
PS: Yes, the title was inspired by commentary on another great transition in contemporary times; see Jon Elster, “The Necessity and Impossibility of Simultaneous Economic and Political Reform,” in Greenberg, ed., Constitutionalism and Democracy.
Hat Tip: Michael Froomkin.
September 25, 2008 at 10:30 am
Posted in: Economic Analysis of Law
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