J. Brad Hicks (bradhicks) wrote,
J. Brad Hicks

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You Know It's Not Just a "Mental" Recession Because ...

How do you know that the economy is in a real recession, not just an imaginary one, one that's all in your head, a "mental" recession? When a Republican is out of work.

A particular Republican is out of work, actually: lobbyist and former US Senator Phil Gramm, the guy who said that the recession was something entirely imagined by a "nation of whiners" -- until he was laid off himself. OK, I'm aware that the newspapers say that he quit "to end this distraction." But trust me, he's out of work, and I don't think there's any doubt that this was a "quit or be fired" moment. Okay, he's really more of an involuntary retiree than the victim of a lay off, and I'm sure he has some rich Republican friends who'll front him his rent and grocery money should it come to that. Still, the fact remains that at this point, the architect of one of the pillars of Reaganomics is radioactive to any potential employers.

Most of the news media have covered this from the inevitable "Presidential horse race" angle, wanting to know what it means to the "contest" between Obama and McCain that Gramm wrote pretty much the entire McCain campaign economic plan; how much of an embarrassment is this to John McCain? And the focus is on that because the top candidates firing, dismissing, cutting themselves off from, betraying, denouncing, renouncing, and/or accepting the only-semi-voluntary resignations of their closest friends, allies, advisers, and staff has been a recurring thread this year, to the point where most news editors and many journalists are begging the rest of the commentariat to throw the phrase "throw (someone) under the bus" under the bus.

But there's a bigger news story here than the wannabe horse-race handicappers trying to juggle the odds on which "horse" will cross the "finish line" ahead of the other, and I'd like to thank the Washington Post's columnist E.J. Dione for calling it to my attention last Friday on Countdown with (No, Really, This Time) Keith Olbermann. Because Dione came very close to predicting this news story, a week in advance, pretty much by accident, with his column for July 11th, 2008: "Capitalism's Reality Check" (registration required). Because in a very real way, the 2008 election isn't about Barack Obama or John McCain. In a weird sort of a way, it's an actual national referendum about Phil Gramm. Because before he was before he was UBS lobbyist Phil Gramm, before he was Senator Phil Gramm, before he was U.S. Representative Phil Gramm, he was Texas A&M University professor of economics Dr. Phil Gramm, whose entire life's work has been about laissez faire economics. He wasn't just the a contributor to the Republicans' "Contract on with America," he was one of the main intellectual architects of Reaganomics, and for him, its founding principle was this:

In the long term, Dr. Gramm argued, it is basically impossible for a business to stay in business by harming its customers, without some unfair form of help from the government. If all government help is withdrawn from businesses, and a free market prevails, then customers will flock to the business that doesn't harm its customers, that business will earn more money than the businesses that do harm their customers, and the bad businesses will either go broke and close their doors or get bought out by the good business. This means that in a free market, any form of government regulation aimed at preventing companies from harming their customers is unnecessary. What's more, the effort that the government spends on checking up on companies that it thinks could go bad costs money, so they have to raise taxes to pay for the compliance checkers, including taxes on those companies. What's more, companies that are having to look over their shoulders at hovering, hostile government regulators have to practice business defensively, have to divert resources that could go into making better, cheaper products into dealing with regulators, have to hire and pay the people who do nothing but placate the regulators, and those costs get passed on to the customer. So according to Phil Gramm (and most other hard-core laissez faire economists) any kind of government regulation of business at all achieves no good end, gives customers no better products or more products than they would have had under a laissez faire market, and does so at a higher cost. Therefore any kind of consumer or citizen or environmental protection by government is an inherently bad thing.

When he was doing his academic work back in the 1970s, American businesses' regulatory compliance costs were at their all-time maximum; from the 1890s to the early 1970s, fed-up American voters had demanded more and more protection from companies by government. And when Phil Gramm was doing his academic work, the US economy was in horrible shape. In hindsight, we can see that this had more to do with horrible budgetary mismanagement during the Johnson and Nixon administrations, and the wreckage wrought on the federal budget by the ever-escalating costs of having just lost a major land war in Asia, than it had to do with corporate regulation. But voters, eager for a fast way to repair the wreckage of the Carter-era economy, were willing to listen to the many US businesses who were claiming that there wouldn't be so much inflation if they didn't have to spend so much money hiring people to protect them from unnecessary government regulators. And, in fact, by the end of President Reagan's first term, this academic and political argument had so thoroughly won the day that it not only became a permanent bedrock principle of the Republican Party (where it was no big surprise, as hands-off-big-business had been Republican party dogma since the robber-baron days of the 1880s and '90s), but it even became the majority position on economics in the Democratic Party, as well.

So we've spent the 28 years since Ronald Reagan won his first election to the US Presidency rolling back regulation after regulation, trusting more and more in "voluntary compliance" and "market-based solutions." And even where some regulations were too popular to repeal, businesses in formerly heavily regulated industries like banking, lending, real estate, and finance found ways to shift all of their actual money, all of the actual economic activity, into what had been niches too tiny to come to regulators' attention during the heyday of government regulation. We got exactly what Phil Gramm devoted his entire career to trying to persuade us to want, an almost completely unregulated economy. So it's not terribly surprising that Phil Gramm thinks that our current economy is really, really great; he just wants his side's politicians to make whatever bare-minimum entirely-symbolic gestures are necessary to placate the American voting public long enough for the "invisible hand of the market" to weed out the bad actors and turn the economy over to the good companies, still at a lower cost than government regulation.

But here's what E.J. Dione was writing about, a week ago last Friday: Phil Gramm, and his friend John McCain, and a few equally hide-bound ideologues with no actual business experience of their own, are practically the only people left on the planet who still think so. The same companies that spent the 1970s through the 1990s begging for less and less regulation are now begging for more and more regulation, and so are ever more of the Republican politicians that are beholden to those companies. Not just the American voters, but American companies, are standing up to Phil Gramm and saying en masse, "We tried it your way, and it turns out that it doesn't work." They don't want to hear from some pointed-headed economist turned politician turned lobbyist, who not only never managed a business but who never even worked a day of actual work in his life, how the economy "ought to work." They can see with their own eyes that it didn't turn out that way.

There is, actually, a reason why it doesn't work. It would not be entirely fair to penalize Professor Gramm, Ph.D., for not having foreseen this; much of the math didn't exist during his academic tenure. There have been an awful lot of advances in economics, especially coming out of the application of the school of mathematics known as "games theory," that couldn't have been made without fast and inexpensive computer simulations. But having done the math, and seen the results, there's a perfectly logical explanation in plain English that we can now give. When I do give it, it's going to sound so obvious that you're going to ask, well, sure, why didn't they see that coming? And all I can say to that is, you weren't there, it was a much more primitive world back then. Anyway, here's the reason why it doesn't work: all too frequently, the market doesn't have time to fix itself. Suppose that even just one company cheats by finding a way to make its products more profitable in a way that harms the buyers or that downstreams costs to its non-customers, imposes costs on them involuntarily, and manages to keep this at all secret for even a matter of months, or at most a couple of years. It can then drive prices down to the point where none of its competitors are making any money. They go bankrupt; this company then buys them out or monopolizes the market.

As one company cheats, therefore, there are morally crippling pressures on other companies to find ways to match the cheating company's prices; if anybody cheats, they all know within a matter of at most a few months that they have to cheat, too. Nor can they go public with their knowledge that the other company "must be" making deadly safety compromises with their product or dumping toxics onto an unsuspecting public. They know from their own business experience that that's the only way that the other company can be making that product, in the same market they are, with the same raw materials costs and vaguely similar wages and the same broadly-known business practices ... but they can't prove it in a court of law. It could take them years to find the evidence they'd need to protect themselves if they made that accusation and got sued for libel and slander. And they don't have years; they'll be out of business long before then, probably.

Nor does it help that we had a wave of shareholders' rights lawsuits back in the 1970s and 1980s, all with the same conclusion: company boards of directors have a fiduciary duty to their shareholders to maximize shareholder return in the short run, and since it is a fiduciary duty, they can be sued for not doing it. If there are investors out there (and there are) who think that the company should take insane risks with public safety because their competitors are doing so and thereby returning more value to their shareholders, it doesn't even help if the company that would rather do the right thing and wait for the market to catch up is still somehow minimally profitable, or if it has the cash reserves to wait until the evidence comes out: they'll still get sued, there'll still be a hostile takeover of that company, and new management will be put in that has no such optimistic faith in the goodness of markets.

And all of that makes Phil Gramm what he richly deserves to be: a retiree. At age 66, he's an academic economist who, through his success in politics, actually got to experiment with an entire nation's economy. As a "scientist" who still won't admit that the experiment didn't produce the results that his hypothesis said it would, even after all the evidence is in, he deserves to never work again; he's not just a bad person, he's a poor scientist. So he belongs where he is now, laid off, unemployed and unemployable, living off of Social Security and his US Senate pension, not anywhere near the reins of power; Gods help us, if he could, he'd repeat the experiment again, rather than admit that his model was flawed, in hopes it would turn out differently a second time.
Tags: current events, economy, election 2008, history, politics

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