Fearful Symmetry: The Fall and Rise of Canada’s Founding Values

REPORTS OF CAPITALISM’S DEATH HAVE BEEN GREATLY EXAGGERATED

Some readers will object that Fearful Symmetry’s argument assumes that today’s economic downturn is but a temporary bump in the road, and that in due course we will return to the kind of market-driven economic growth described in later chapters. Moreover, the book assumes that America, far from being finished as a global superpower, still has its best days ahead of it.

Our current economic difficulties have certainly unleashed a torrent of commentary to the effect that capitalism’s day is done, that the downturn proves that private business is irretrievably corrupt and cannot be trusted because our woes are entirely the fault of greedy bankers and insurance companies and rating agencies and market manipulators.[1] Wise governments will henceforth need to replace this vicious system with disinterested technocratic management. Friedman is dead. Long live Keynes.[2]

No one can deny that greed led a number of managers to take outrageous risks with the institutions with which they were entrusted, or that they were richly rewarded even after their companies either failed or were bailed out at taxpayer expense. Their misjudgments were compounded by their shameless clinging to bonuses and other entitlements to which they had little moral claim, however much their employment contracts guaranteed them.[3]

But this constitutes no indictment of liberal capitalism as an economic and political system, nor does it establish that there is some clear, and clearly superior, alternative. Painful as the short-term stalling of the economy is, with all its attendant job losses, plant closures, bankruptcies, and family crises, we cannot lose sight of the tremendous economic benefits our economic system has bestowed on us over the years. More and more of the world has been drawn to this system, especially since the collapse of the Berlin Wall.

Previously moribund economies in Eastern Europe, Asia, and Latin America have enjoyed robust growth by becoming more tightly bound into the world economy, and the freer movement of goods, capital, services, and people have dragged more people out of poverty than at any other time in world history.[4]

Consider the following extraordinary statistics about the performance of the world economy since 1980. World real gross domestic product grew by about 145 per cent from 1980 to 2007, or by an average of roughly 3.4 per cent a year. The so-called capitalist greed that motivated business people and ambitious workers helped hundreds of millions to climb out of grinding poverty. The role of capitalism in creating wealth is seen in the sharp rise in Chinese and Indian incomes after they introduced market-based reforms (China in the late 1970s and India in 1991). Global health, as measured by life expectancy at different ages, has also risen rapidly, especially in lower-income countries. Of course, the performance of capitalism must include this recession and other recessions along with the glory decades. Even if the recession is entirely blamed on capitalism, and it deserves a good share of the blame, the recession-induced losses pale in comparison with the great accomplishments of prior decades.[5]

In Canada and other Western countries, periodic downturns never wipe out the gains in income and economic well-being realized since the previous downturn, and once the recovery comes, we invariably move on to new economic achievements.

When the downturn is done, we will still want bankers and other financial institutions to be able to move capital from those who have more than they need to those who can only realize new economic opportunities by borrowing the capital of others. The fundamental reasons that make a system of private initiative within the framework of the rule of law superior to the government-dominated alternatives will still apply.[6] Even the Chinese, whom one might expect to be readier than most to defect from reliance on markets to power growth, have restated their commitment. According to The Economist, “Chinese leaders have been at particular pains to avoid giving the impression that China is wavering in its commitment to market capitalism (albeit with a heavy admixture of government control).”[7] Chinese president Wen Jiabao delights in reminding people that his favourite bedtime reading these days is Adam Smith’s master work, The Theory of the Moral Sentiments.

In any case, Manichean explanations casting the world in a comforting two-dimensional battle between good and evil are rarely much help in understanding a world composed largely of shades of grey. Those who have always opposed capitalism and economic freedom have uncritically leapt to the attractive conclusion that all that has gone wrong can be laid at the doorstep of evil capitalist plutocrats, while years of allegedly savage deregulation have prevented kindly and objective governments from stopping greed and self-interest from wreaking havoc.[8]

Yet the best book so far on the economic downturn of 2009–10, John B. Taylor’s Getting Off Track, has as its subtitle How Government Actions and Interventions Caused, Prolonged and Worsened the Financial Crisis. In the book Taylor, a prominent economist, Stanford professor and adviser to central banks around the world, tells the story of how government institutions played a key role in the creation of the recession of 2008-09 . In particular, he draws our attention to the close relationship between too-loose monetary policy by central banks and the housing price bubble. Had governments followed the so-called Taylor Rule for interest rates (named after John B. Taylor himself, who famously proposed this rule for guiding monetary policy in 1992), the asset price bubble likely would have been avoided, and with it the risky lending practices that have brought so much misery in their wake.

He also points out the extent to which governments directly encouraged these risky practices. Fannie Mae and Freddie Mac, both U.S.-government-sponsored agencies, were pushed by politicians to encourage home ownership, which they did by expanding and buying “mortgage-backed securities, including those formed with the risky subprime mortgages.”[9] He might also have mentioned the American Community Reinvestment Act, which forced banks to make risky home loans for political reasons by requiring them to lower their lending standards,[10] as well as the 1997 tax law that increased the capital gains exemption for residential home sales, which encouraged the practice of flipping houses for short-term gain.

Taylor also demonstrates convincingly that governments misdiagnosed the causes of the crisis once it had begun and therefore took the wrong policy steps a year into the downturn, making things demonstrably worse, not better. So much for avuncular and trustworthy governments being a safe haven after the excesses of greedy markets and capitalists.

In fact the downturn has only reinforced the views of mainstream economists about how wealth and jobs are created. As economist William Easterly has written[11], much of that consensus[12] can be summed up as follows:

Free trade does create opportunities for firms and workers doing what they do best. The government can’t forever spend money it doesn’t have. Competitive markets reward innovation and efficiency and punish customer-abusing would-be monopolies. Rapid deregulation has its risks, which we have learned that financial regulators should manage carefully, but too much regulation is far worse.

A group of leading economists from across the ideological spectrum signed on to a statement underlining these important principles just before the 2009 World Economic Forum in Davos. Far from decrying deregulation, the signatories were much more worried that those countries that had not deregulated enough before the downturn would see the current circumstances as a reason to retreat. While recognizing that some modest regulatory tightening might be required, they wrote:

Many countries in the midst of this deregulation backlash are starting from positions of already very high levels of bureaucracy, countries which furthermore have a tradition of strong government intervention. There is thus a danger that over-regulated economies may be about to become even more regulated. (This was one of the very damaging follow-on effects of the Great Depression—a closing off by many countries to international trade.)[13]

Finally, it is unclear what alternative model is being suggested to take the place of open markets, free trade, private initiative, and accountability under the rule of law. Even governments being forced by circumstances to take over failing banks in Western countries are assuring voters and investors that they will get rid of them as soon as possible. Canada, which followed with some modest enthusiasm the deregulatory fashion of the last decade, has weathered the current downturn much better than most. Russia and China, both with heavy government involvement in the economy, have been battered by the downturn. Many European banks, often held up as bulwarks of solidity and stolidity, and backed by conservative regulation, were much more heavily leveraged (i.e., carried a lot more debt relative to equity) than their American counterparts, who are singled out as the villains of the piece.

Nor is the downturn itself proof that governments need to have large powers to step in and direct the economy to avoid such crises in the future. Taylor shows in fact the opposite. It was only when governments and central banks tamed their temptation to intervene arbitrarily in markets in the early eighties that was unleashed what economists call the Great Moderation. Essentially by applying the Taylor Rule to monetary policy, an era of great stability was ushered in. “Only two recessions occurred in the 25 years from the end of the 1981–82 recessions in the United States until 2007, and those two recessions were very short and mild by historical standards….The improvements did not occur only in the United States; similar improvements were seen in other developed countries around the world.”[14] It was only when governments and central banks began to lose their bearings and abandoned discipline and clarity in monetary policy in particular that the economy went off the rails. That hardly justifies giving governments more such power in the future; rather it is a further argument for limiting their power to do harm by binding them to rules that limit their arbitrary discretion and create certainty for workers, employers, and investors.

Like it or not, this is no crisis of capitalism, the downturn has not proven the moral or financial bankruptcy of markets, and no serious proposal is on the table by any important government that would do anything but tinker with the regulatory framework for capitalism that has been established in the last half century. What this latest downturn has proven yet again is that liberal capitalism is the worst of all possible economic systems—except for all the others.

True, the United States has probably been wounded more than many economies through the combined efforts of bankers and politicians. Furthermore, the downturn coincides with the arrival in office of a Democratic president and Congress who seem determined to raise taxes, expand health care coverage, tackle the entitlement mess in social security, and run multi-trillion-dollar deficits to finance these changes and pay for huge stimulus and bailout packages. All of this is going to be painful. But Americans are a resourceful, irrepressible, and inventive people who have seen worse and always triumphed over adversity.

I see no reason to think this time will be any different. The question is not if America will rise again from its economic difficulties, but when, and how much damage will be done by poor policy in the meantime to its economy, the greatest wealth-generating machine the world has ever seen.


[1] There were countless examples of this line of argument in the mainstream media and international political arena early 2009. From French president Nicholas Sarkozy to Nobel Prize–winning economist Joseph Stiglitz, various commentators have called for the overhaul of liberal capitalism. See, for instance, Jeff Madrick, “Beyond Rubinomics (Cover story),” Nation (January 12, 2009), pp. 14–18; Rheal Seguin, “At gathering of leaders, Sarkozy to push for ‘new form of capitalism,’” Globe and Mail (October 18, 2009), p. A16; and Anthony Faiola, “The end of American capitalism?” Washington Post (October 12, 2008), p. A1. In Canada, the perceived death of capitalism has been eulogized by some, and celebrated by others. See, for instance, “American capitalism, R.I.P,” National Post (April 1, 2009), p. A10; and Mahmood Elahi, “Satanic optimism of capitalism haunts us,” Ottawa Citizen (March 30, 2009), p. A9.

[2] See Jon Meacham Evan Thomas, “We Are All Socialists Now (Cover story),” Newsweek, Vol. 153, No. 7 (February 16, 2009): 22–24.

[3] The objectionable case of the American insurance giant AIG has come to symbolize the worst excesses of this “entitlement mentality” among some on Wall Street. For more details, see “AIG pelted with virtual tomatoes,” Calgary Herald (March 24, 2009), p. D1; and James Travers, “Public at tipping point on bailouts,” Toronto Star (March 21, 2009), p. A10.

[4] On this point see the work of Columbia University economist Xavier Sala-i-Martin on falling global economic inequality: http://www.columbia.edu/~xs23/papers/pdfs/World_Income_Distribution_QJE.pdf; UCLA’s Deepak Lal’s The Poverty of ‘Development Economics,’ 3rd edition (London: Institute of Economic Affairs, 2000); and Columbia University’s Jagdish Bhagwati’s In Defense of Globalization (Washington: Oxford University Press, 2004).

[5] Gary Becker and Kevin Murphy, “Do not let the ‘cure’ destroy capitalism,” Financial Times (March 20, 2009), p. 9.

[6] In his Nobel Prize acceptance speech, economist F.A. Hayek laid out one of those fundamental reasons: the necessary ignorance of governments about the complex facts on the ground in a modern economy. “The Pretence of Knowledge,” Les Prix Nobel en 1974 (Stockholm, 1974).

[7] “Briefing: China and the West, A Time for Muscle-Flexing,” The Economist (March 21, 2009), p. 27. (there is an inconsistency in the footnotes between ‘The’ Economist and Economist. In some cases, the copy-editor has added ‘The’ and in other cases, he or she hasn’t. In the bibliography ‘The’ is always used. Either way is probably acceptable)

[8] See, for instance, Richard Gwyn, “Unchecked, unregulated greed breeds corruption,” Toronto Star (March 20, 2009), p. A23; and Thomas L. Friedman, “Greed, stupidity, dishonesty, and the market collapse,” Times Colonist (Victoria, B.C.) (December 1, 2008), p. A10.

[9] John B. Taylor, Getting Off Track: How Government Actions and Interventions Caused, Prolonged and Worsened the Financial Crisis (Stanford: Hoover Institution Press, 2009), p. 14. The book is largely an expanded version of a lecture Taylor gave in Ottawa in honour of his friend and sometimes colleague in the international world of central banking, David Dodge, the former governor of the Bank of Canada.

[10] On this see, Alex Castellanos, “The Tyranny of Good Intentions,” National Review Online (September 25, 2008), http://article.nationalreview.com/?q=MWU2ODgzNzg2MmIyN2Y3ZWFjY2ZlODVmMTgzYjMwMjY=; and Thomas Sowell, “Subprime Pols,” National Review Online (August 8, 2007), http://article.nationalreview.com/?q=YjgwYzI4Njg3OWMxOGUzYmY0ZDMwYzYwNzkzYjc1NDI=.

[11] William Easterly, “Leaders Go Left, But Economists Get Back to Basics: In Trying Times, Even Protectionists Go Free Market,” Forbes (January 29, 2009). http://www.forbes.com/2009/01/29/davos-economic-basics-opinions-contributors_0130_william_easterly.html?partner=email.

[12] Contrary to the popular view that economists rarely agree on anything, Harvard economist Greg Mankiw recently listed fourteen propositions on which economists surveyed agreed in proportions of 80 per cent and higher. Here are three relevant propositions for this discussion, with the percentage of economists agreeing with the statement shown in brackets: tariffs and import quotas usually reduce general economic welfare (93 per cent); the United States should not restrict employers from outsourcing work to foreign countries (90 per cent); a large federal budget deficit has an adverse effect on the economy (83 per cent). http://gregmankiw.blogspot.com/2009/02/news-flash-economists-agree.html.

[13] Network of Global Agenda Councils, “Discussion Highlights on Economic Growth and Development at the Summit on the Global Agenda,” Dubai, United Arab Emirates November 7–9, 2008, http://www.weforum.org/pdf/GAC/Reports/EconomicDevelopmentGrowth/EconomicGrowthandDevelopment.pdf.

[14] Taylor, Getting Off Track, p. 34.

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