A most striking fact about the global financial crisis and its aftermath is how far from striking the policy response has been. That is a change from earlier economic history. For the past century and more, the deepest political and economic crises have produced transformational reforms. This time is different.
Franklin D Roosevelt’s New Deal was the epitome of crisis turned into opportunity. Within months of taking office in 1933, Roosevelt had taken the dollar off gold to reflate the economy, shut down and reopened the banking system after equipping it with deposit insurance, launched large public works programmes, radically regulated Wall Street and introduced a minimum wage. Social security, trade liberalisation, and housing policy reform soon followed.
The New Deal was exceptional in its hyperactivity, but other crises, too, have seen large-scale efforts to recast our economic systems. In the late-19th century, endemic financial instability and increasingly concentrated wealth and market power in the US led to a permanent income tax, a central bank, and an earlier (Theodore) Roosevelt’s trustbusting. After the second world war, a consensus in all western countries created the social democratic mixed economies many now seem to long for.
Compared to any of this, the past decade’s policies have been pusillanimous. The 2008 financial crisis was the most violent economic shock to hit most of the rich world in a lifetime. Yet hardly any policy effort has emerged to match the magnitude of the challenge.
True, governments have reined in financial markets. True, too, the 2009 co-ordinated fiscal stimulus arrested the downturn. But the financial system has undergone much less change than in the 1930s, and the stimulus was far too quickly withdrawn. Europe’s banking union may in time bring radical change — though fierce resistance makes it too soon to say.
Monetary policy seems superficially to have stepped up to the plate. But even the “unprecedented” actions of central banks have amounted mostly to using well-tried tools — open-market securities purchases, interest rate cuts — at greater scale than before. There has been no revolution.
All in all, our generation of leaders has failed to show the boldness mustered in previous showdowns with history. If a politician with FDR’s mettle had appeared in 2008, or indeed today, what might he or she do? Here are three proposals a committed reformer should contemplate. Like the New Deal, they are radical but realistic.
A latter-day Roosevelt must, like the original, look at monetary reform. Now as then, the problem is how to avoid too much liquidity in the boom and too little in the bust. But this may be impossible so long as money creation — and destruction — remains in the hands of private, profitmaking banks. Only a tiny fraction of the money supply consists of physical cash minted by central banks. The bulk is bank deposits, claims on private financial institutions created when those institutions issue loans.
So in exuberant times, the money supply expands too fast, causing resource misallocation and impossible expectations about future incomes. When the mood changes, banks create too little money to keep activity buoyant, credit issued in the boom goes bad, and debt deflation sets in. Central banks’ “unprecedented” money creation has only partially offset this.
If private management of the money supply is a recipe for instability, the radical alternative is to nationalise the money supply. This is do-able today: central banks can offer accounts to all members of the public (or make central bank reserves available to everyone). Banks could be restricted to allocating existing savings to investments, rather than creating new credit.
Another imperative is that of economic security. Previous radicals created safety nets where none existed. Today we have ample welfare states, but they still leave large groups in precarious conditions. Sometimes they trap them there, as generous benefits for low earners are withdrawn with rising incomes, creating prohibitive effective marginal tax rates for the modestly paid. The radical solution is a universal basic income, the proposal to pay an unconditional benefit to all citizens, financed by tax rises. The idea is rediscovered by every other generation; the time to put it into practice may now have come.
Finally, revisit the US antitrust policies of the turn of the previous century, when leaders channelled popular resistance to the stranglehold of large oil, industrial and railway companies. Today, internet giants enjoy a similar dominance.
A brave politician would seek to end internet platforms’ ability to skew our markets — and our politics. Internet services with economic functions similar to public utilities should be regulated as such so as to make them behave in the public interest.
Many sensible people will hesitate to embrace these ideas. But what if the alternative is not the status quo, but the nativist authoritarianism now on the rise? The deepest lesson from the Roosevelt era is that liberal centrists should wield their own radicalism lest they have radical illiberalism thrust upon them.
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