The Time to Punish
Brad DeLong recommends Martin Wolf:
Keynes’s genius – a very English one – was to insist we should approach an economic system not as a morality play but as a technical challenge. He wished to preserve as much liberty as possible, while recognising that the minimum state was unacceptable to a democratic society with an urbanised economy. He wished to preserve a market economy, without believing that laisser faire makes everything for the best in the best of all possible worlds.
This same moralistic debate is with us, once again. Contemporary “liquidationists” [on the right] insist that a collapse would lead to rebirth of a purified economy. Their leftwing opponents argue that the era of markets is over. And even I wish to see the punishment of financial alchemists who claimed that ever more debt turns economic lead into gold. Yet Keynes would have insisted that such approaches are foolish.
I’ve inveighed many times against neo-Hooverite rightwingery here. And on Boxing Day I was able to put in a decent amount of time in my gym’s sauna and enter a Zen meditative trance in which I fully purged myself of any lingering desire to see the punishment of financial alchemists who claimed that ever more debt turns economic lead into gold.
What lingers after the trance, however, is a firm conviction that they should have been punished earlier. That, specifically, back during years like 2002, 2003, 2004, 2005, and 2006 or in years like 1997, 1998, and 1999 there were a lot of people earning a great deal of money and that it would have been smart to take a nice chunk of that money away from those people and spend it on useful projects like helping citizens avoid malnutrition, doing something about our ridiculous child poverty rate, building cool trams everywhere, or investing more funds in the labor force policing our streets and teaching in our schools. But back during those years, the tax hikes weren’t being implemented. And we were told they weren’t being implemented for a mix of reasons — on the one hand, a principled aversion to meddling in the market, and on the other hand a pragmatic necessity to let those folks get as rich as possible lest society at large be deprived of the larger fruits of their efforts. What you see during the crash is that those rationales are essentially hollow and bankrupt.
And I, for one, intend to remember that fact when growth returns. Will Martin Wolf be with me?
37 Responses to “The Time to Punish”
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January 5th, 2009 at 1:32 pm
Let me be the first to say that “punishing” said alchemists with higher taxes—which is what Matt seems to be implying in his post— would not, in my opinion, have made one bit of difference in solving the underlying problem, which was lack of regulation. Pile on!
January 5th, 2009 at 1:37 pm
James Gary – you are right, and I don’t see any disagreement in Matt’s post. But even so taking some of that money would have had two beneficial effects: shrinking the maldistribution of wealth caused by those bullshit artists and providing needed goods and services to those at the bottom.
Things can be good, even if they don’t fix everything.
January 5th, 2009 at 1:41 pm
It seems to me James Gary is right here.
I understand Matt’s feeling, but I’m not sure the connection to taxes really works logically. It certainly works emotionally . . .
January 5th, 2009 at 1:45 pm
Just to be clear, I’m all for raising the capital gains tax rate.
But I’m not sure that financial crashes really provide a rationale . . .
Well, wait, maybe Matt *is* right. Because you could probably say that setting capital gains tax rate lower than the tax on other forms of income is a policy designed to encourage and reward speculation. It only makes sense if you believe that Wall Street is somehow *better* than other forms of economic activity. And certainly financial crashes do remind us that it is a mistake to worship at that particular idol.
January 5th, 2009 at 2:00 pm
When do we get to punish Barney Frank, Chris Dodd, Rep. Joe Baca and the rest of the Hispanic Congressional Caucus? When do we get to punish the officers and alumni of Goldman Sachs, who have had their tentacles in the highest reaches of both parties for decades, and who have been the primary beneficiaries of the bailout so far?
January 5th, 2009 at 2:05 pm
I understand Matt’s feeling, but I’m not sure the connection to taxes really works logically. It certainly works emotionally . . .my home this one
January 5th, 2009 at 2:10 pm
I’ll certainly agree that I have read some socialists recently arguing that markets are (still) not the answer, but is Wolf suggesting that there are any publicly prominent “leftwing” opponents who are not only arguing that a deregulationist fantasy of the market is “over” but that literally markets are over?
I’d find it pretty cool if there were still publicly prominent actual socialists out there, I mean, actually advocating the end of capitalism, but I don’t even see that when I read, say, the Monthly Review on the current economic collapse.
January 5th, 2009 at 2:16 pm
The libertarians are so incredibly concerned about the financial bailout creating a moral hazard, so I’m sure they’d be on board with some disgorgement.
HA HA HA HA HA HA HA HA HA HA HA HAHA HAAAAAAAAAAAA!!!!!
Hoo, boy. I kill me.
January 5th, 2009 at 2:20 pm
Fred,
We’ll get around to punishing people like Dodd and Frank when there is something other than the fevered imaginings of the Vince Foster conspiracy people to indicate that those legislators had anything to do with the financial meltdown.
January 5th, 2009 at 2:40 pm
It’s not a matter of punishment. It’s a matter of inflationary theory applied to the investment class.
The bubbles are because too much money is chasing too few investments. Over time, it becomes harder and harder to stretch these markets, and thusly , the bubble pops. Find ways to limit the money that goes into these particular markets, and the bubble grow slower. You will still have them, but probably not as often.
Tax cuts are a GREAT idea in a situation where there’s substantial under-capitalization. And actually, right now might be such a time. But tax cuts in a time of over-capitalization, which is what existed for the last few years, is what caused this mess.
January 5th, 2009 at 2:47 pm
I’m normally against punitive tax rates on upper income brackets, but the standard claim that it will slow down economic activity seems to be a feature, rather than a bug, in the case of the Financial Services industry.
If the government were taking 50% – 80% of the money made by people in the financial services industry over the last decade, it’s entirely possible that there wouldn’t have been the rush to find ever-more-ridiculous ways to manufacture short-term gains at the expense of sound long-term strategy.
January 5th, 2009 at 2:48 pm
Re: I’ll certainly agree that I have read some socialists recently arguing that markets are (still) not the answer, but is Wolf suggesting that there are any publicly prominent “leftwing” opponents who are not only arguing that a deregulationist fantasy of the market is “over” but that literally markets are over?
In Venezuela and Bolivia, certainly. Not so many in the United States, more’s the pity.
January 5th, 2009 at 2:57 pm
Granted, Hector, and you’re correct that I made an assumption about it being within the US-UK public sphere, particularly with the sort of prominence which is commonly assumed in such matters.
But to be honest, you could even argue that not even leadership in Venezuela or Bolivia are yet discussing the elimination or replacement of markets, although there is a great deal of talk of socialism and to create semi-parallel institutions and increasing public ownership investments. I’m not an expert on these matters, but although I read a good bit internationally, I don’t feel that I have read such literally anti-market rhetoric there.
January 5th, 2009 at 3:02 pm
Yes, there’s a great article in the Wall Street Journal today documenting my argument that the huge bipartisan push to increase minority homeownership was central to the mortgage meltdown:
http://online.wsj.com/article/SB123111072368352309.html
Unfortunately, it doesn’t mention George W. Bush’s extremely high level of culpability in this disaster.
January 5th, 2009 at 6:13 pm
But tax cuts in a time of over-capitalization, which is what existed for the last few years, is what caused this mess.
No, it was low interest rates in a time of over-capitalization (i.e. the Fed printing money hand over fist) that caused this mess. And the solution that the Fed has to this mess is to print even mroe money to try to keep the bubble going.
And yes, I do believe that the push to increase minority homeownership was part of the cause of the mortgage meltdown, but the fact of the matter is that fiat money and fractional reserve banking is what funded all of the bad investments, and without it, the problem would not have existed.
January 5th, 2009 at 6:53 pm
Repackaging, over-rating, and selling debt is both morally and technically a very damaging practice.
January 5th, 2009 at 9:00 pm
“fiat money and fractional reserve banking is what funded all of the bad investments, and without it, the problem would not have existed.”
Nonsense. Israel, for one of numerous examples, has fiat money and fractional reserve banking and had no mortgage bubble. The reason is that they maintained strict underwriting standards and had no political reason (increasing black and Hispanic home ownership) that would lead them to lower those standards.
January 5th, 2009 at 11:00 pm
The reason is that they maintained strict underwriting standards and had no political reason (increasing black and Hispanic home ownership) that would lead them to lower those standards.
Spain, Bulgaria, and the UK also saw massive housing bubbles, as well. Your moral flaw is that you look at every public crisis and immediately attempt to scapegoat brown people. Not very helpful to leap to blame minorities for every single one of your problems, instead of blaming yourself and gutter-filled political ideology you dedicated yourself to.
January 6th, 2009 at 12:22 am
That does seem to have contributed greatly to the housing bubble, but conversely it has a relatively easy fix–stop departing from the Taylor Rule!
But departing from the Taylor Rule is what fiat systems do. It’s like telling a man and a woman (who are both heterosexual) to go to bed naked together every night but not to have sex. It’s not gonna work.
January 6th, 2009 at 2:50 am
And we were told they weren’t being implemented for a mix of reasons — on the one hand, a principled aversion to meddling in the market, and on the other hand a pragmatic necessity to let those folks get as rich as possible lest society at large be deprived of the larger fruits of their efforts. What you see during the crash is that those rationales are essentially hollow and bankrupt.
Well, the second one anyway.
January 6th, 2009 at 9:20 am
I have to agree that it’s not a matter of punishment.
Look, it’s very simple, if you want a functional society, you have to pay for it. And you have to find the money somewhere. That means it has to come from that society on some form of equitable basis.
Well, first, America doesn’t have a functional society. South Central LA or the Projects or the Combat Zone is not a libertarian utopia, it’s just urban blight. Hell, the response to Katrina was not a functional society, and Louisiana before or after were not functional. The half baked money grinder that passes for a health care system is not functional. It’s roads, its bridges, its public works, its water and sewer systems, the legacies of bygone eras, are barely functional and get less so over time.
Second, America isn’t even paying for the crappy joke right now. Instead, the whole country is racking up massive debt.
Said dysfunction and massive debt deriving from the refusal of large sections of American society at the upper levels to contribute their fair share, or any share, to the upkeep of the society that treats them so well. Thus leaving the burden on the peons.
Morality got nothing to do with it. You either have something that works, or you don’t. America don’t work.
Wake up.
Third,
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