From the December 27, 2009 Sunday Times (London)
December 27, 2009
by Irwin Stelzer
No sense in wasting too much of this year-end report on what you already know.
The financial sector is back from the brink. The largest banks have been able to raise capital and earnings sufficiently to repay their government bailout loans and have enough left over for generous bonuses. Share prices have recovered half the losses made since they peaked. Sales of existing homes are at close to a three-year high, but the sector has a glut of new homes. The job market is improving, but the unemployment rate is in double digits, and almost 40% of those out of work have been jobless for 27 weeks or longer. The American healthcare system is about to be placed under government control. Ben Bernanke is to be confirmed for another term as chairman of the Federal Reserve Board while he figures out when and how to drain liquidity from the system. And President Barack Obama, although still popular, has seen his popularity rating drop below that of Bill Clinton and George W Bush at this time in their presidential careers.
So much for what is obvious even to the casual observer. Less obvious are some important changes that are likely to be with us long after the current recession is history.
For years, perhaps decades to come, Americans will be whittling away at the mountain of debt the Obama administration has built. On the day before Christmas, immediately after passing the healthcare bill, the Senate joined the House in raising the debt ceiling so that the administration could borrow enough — $290 billion — to keep the government running, but only for a few months.
There is too much red ink for it to last longer than that. Congress is also preparing a second stimulus — it will have a different name — and instead of using the repayments of the government’s bailout loans to reduce the deficit, the president and Congress are converting it to a slush fund to be spent on new programmes. Throw in the fact that nobody in Washington believes the healthcare bill will not add to the deficit, and Americans will remember 2009 as the year they loaded huge burdens on their children and grandchildren.
They will also remember 2009 as the year that class warfare reared its ugly head in a country long free of the divisions associated with that European disease. Of necessity, the government devoted its resources to bailing out Wall Street while the unemployment rate, home repossessions, and hard times hit Main Street. No use explaining that the financial system had to be saved so that it could again extend credit to small businesses and worthy consumers, not when the bankers, having been saved by the taxpayer, used the first sign of profits to vote themselves enormous bonuses for, according to the head of Goldman Sachs, doing “God’s work”. Little wonder the president sees political profit in attacking “fat-cat bankers”.
The good news is that this “us versus them” attitude emerges periodically in America but rarely survives after needed reforms are made. Unfortunately, we now have the toxic combination of extraordinarily insensitive bankers, a president determined to “transform” American society, a swollen army of government employees, and congressional leaders sufficiently to the left of mainstream America to make it uncertain that envy can once again be pushed to the margins of American political life. Be afraid, be very afraid.
The year ending also saw the first signs of a permanent change in the relationship between the government and the private sector. The most obvious, partly because it is bankers’ pips that squeak the loudest when squeezed, is the new role of government in setting pay. True, the “pay czar’s” remit is technically limited to certain employees of financial institutions that are in hock to the government, but in fact his decisions are affecting the pay patterns in the entire financial sector.
Meanwhile, government appointees are changing the way General Motors does business, with effects even on Ford, which refused to suck the government teat. And healthcare is not the only industry that will be transformed by government. Energy is next on the list, now that the Environmental Protection Agency has the power to control carbon-dioxide emissions and therefore to determine who may use what sorts of energy and in what amounts.
This year might also be remembered as the one in which the dominant role of the dollar in world trade came to be challenged. China, Russia, Venezuela and several other nations would like to see the dollar replaced as the world’s reserve currency by some sort of international currency such as drawing rights of the International Monetary Fund (essentially, a basket of currencies) or the euro, assuming it survives the pressures of further downgradings of the credit ratings of Greece and other eurozone members.
Finally, this was a year that marked the rout of the economists. Their failure to foresee the near collapse of the world financial system did not do much to enhance the always spurious claim of the profession to be just another of the sciences. It isn’t, never was, and never will be. But many economists pretended that their models mirrored reality, that markets always operate on perfect information provided by perfectly rational consumers, catered to by lenders capable of measuring risk. Students of the institutions that make up an economy, and the culture that underlies economic behaviour, were buried under a mass of mathematics. Economics still has much to teach us, but only after a big rethink by its practitioners, and then not as a substitute for good, common sense of the sort that careful readers of such greats as Adam Smith, John Maynard Keynes, and Joseph Schumpeter will find useful.
I would like to thank the readers of this column for their interest in it, and patience with its errors, and the Hudson Institute’s Astha Shrestha for her unfailingly prompt responses to my data requests. Next week: a look at what 2010 has in store.
Irwin Stelzer is a Senior Fellow and Director of Economic Policy Studies for the Hudson Institute. He is also the U.S. economist and political columnist for The Sunday Times (London) and The Courier Mail (Australia), a columnist for The New York Post, and an honorary fellow of the Centre for Socio-Legal Studies for Wolfson College at Oxford University. He is the founder and former president of National Economic Research Associates and a consultant to several U.S. and United Kingdom industries on a variety of commercial and policy issues. He has a doctorate in economics from Cornell University and has taught at institutions such as Cornell, the University of Connecticut, New York University, and Nuffield College, Oxford.
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