The Other Enemy
Looking back on the G20, there seems little to say that has not been said better by Willem Buiter in his recent blog. I'm going to address a related question: Are our leaders now doing too much, or too little?
Here are some people who think president Obama and prime minister Brown are doing too much: The British (Conservative) and United States (Republican) oppositions, and the governments of France, Germany, Ireland, and the Czech Republic. In varying terms, they fear the same enemy. Fiscal action to combat the Great Recession will cause very large increases in the public debt. In the medium term there will have to be a heavy settling of fiscal accounts. One risk is that governments that have started to enjoy their wider powers will try to pass the burden onto others through inflation or default. Even if they deny themselves this pleasure, they will have to enact tax increases that risk causing large market distortions. Persistent damage to market institutions could ensue, justifying further expansion of the role of government. This is what people mean when they refer to creeping collectivism or socialism.
As I have said before (but Buiter says it better), there is genuine reason here for concern. But those of our leaders that have lined up in the "too much" camp are facing the wrong way. In doing as much as Obama and Brown have been prepared to do, we risk creating one enemy. But the other enemy is the one we will cede power to by doing too little. And this enemy is the more dangerous of the two.
By doing too little, we will give up the political middle ground to populists and pressure groups of left, right, and middle England: protectionists, advocates of self-sufficiency and economic isolation, nationalists, xenophobes, and proponents of extra-parliamentary politics and direct action. I do not meant that such people are all the same; they are not. But whether they fight side by side or against each other, they are capable of destroying confidence in representative democracy. This would give away far more power to arbitrary government than a little gentle Keynesianism.
No one can be 100% sure, but I don't believe our leaders have done too much. They may have done too little. By doing too little, we risk a future governed by those that want to weaken the market economy permanently, or even destroy it, not fix it.
To try to do nothing in the face of the Great Recession is not even desirable. The unnecessary ruin of hundreds of thousands of businesses and households, and the consignment of a similar number of young people to unemployment, would be a great social crime. Bad as it will be to burden our children with a larger public debt in the future, it would be worse to burden them with a Great Depression in the present. The current wave of layoffs and bankruptcies is already under way, and nothing can now stop that, but we can and should do all we can to mitigate its extent and duration.
To try to do nothing will eventually fail, because our society will not tolerate complete inaction on the part of its leaders. Remedial intervention in the economy is inevitable. This means that, in the next few years, there will inevitably be more public spending, debt, and regulation. Just as most medications have harmful side effects, remedial intervention that is guided by the best intentions and the best judgements will have harmful spillovers and unintended consequences.
I would like to see remedial intervention carried out by politicians who do not relish it, but understand it as a necessary but temporary expedient, to be reversed in the medium term. I would apply this even to banking regulation: clearly, the regulatory framework must change, but it should not leave a permanently greater role for political action.
Maybe that's too much to ask. But it is what our future demands.
The alternative is to give up the keys of the city to the other enemy: to allow the remedial instruments to fall into the hands of state-building entrepreneurs who will use them enthusiastically to accumulate power, build persistent economic and political monopolies, and gradually acquire the means and motives to suppress criticism and opposition.