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Thursday, October 20, 2011

Rhetoric, Reality, and the Recession

Misdiagnosis leads to bad prescriptions.

An enduring question about the lagging economic recovery is why so many Progressives continue to insist that more government is the solution, considering that we have now had three years of large-scale government responses under two different presidents. It’s easy to say that Progressives will support more government intervention in the economy no matter what the problem is, but I would like to go deeper than that.

Put simply: If you misdiagnose the disease, you are highly likely to prescribe the wrong cure and the patient’s failure to recover should not be a mystery. Many on the left continue to argue that the recession and financial crisis were caused by a deregulated, laissez faire economy, especially in the housing and financial markets. If that is one’s diagnosis of the disease, it shouldn’t be surprising that one will believe the cure is for the government to re-regulate those markets and play a larger role economy-wide as well.

I will come back to the misdiagnosis below, but I first wish to address another issue. If this is indeed what Progressives think, it would be interesting to see how they react when reminded that we have had three years of big government and regulatory solutions: from TARP, the bailouts, and the stimulus, to Dodd-Frank, Obamacare, trillion-dollar deficits, and skyrocketing debt. If the cure for the supposed disease of laissez faire is more government oversight, why have three years of government growth been unable to improve the patient’s condition in any meaningful way? It’s always possible to argue the counterfactual that it wasn’t enough big government to do the trick, but there’s no doubting that the Obama administration (and the last months of the Bush presidency before it) have done a great deal to expand government in precisely the ways many on the left said was necessary. Yet here we are, still with over 9 percent unemployment and people protesting in the streets.

No Other Possibility

I would argue that the Progressives can’t see that their cure isn’t working because they are so convinced of the nature of the disease that they can conceive of no other possibility. And this is where the real ironies enter. In the minds of much of the left, George W. Bush is seen as committed to laissez faire, unregulated, free-market, cowboy capitalism, and therefore the economic disaster must have been the result of those beliefs. They are right in one sense: Bush often did talk the talk of free markets.

But the talk was not the walk. The Bush presidency is a legacy of big-government conservatism: from No Child Left Behind to the Medicare prescription drug benefit to the expansion of the military and surveillance state with its threats to privacy and civil liberties. With respect to the housing and financial markets, Bush continued and expanded the Clinton administration’s attempts to increase access to housing by subsidizing demand and mandating supply for marginal borrowers through Fannie Mae, Freddie Mac, the Federal Housing Administration, and the Community Reinvestment Act. It was Ben Bernanke’s Federal Reserve (he was appointed by Bush) that spiked the punch bowl at the party by driving real interest rates below zero.

In the eight years of the Bush presidency, the federal government passed nine new regulatory measures for the financial markets, including the massive Sarbanes-Oxley law and the Basel capital standards, with the latter having an important role in making it more profitable for banks to sell off the mortgages they originate and buy them back as mortgage-backed securities. Not one piece of financial deregulation was passed during the Bush presidency. The differences between Obama and Bush are matters of degree. One is a big-government conservative and the other is a big-government liberal.

Missed Distinction

What’s interesting about all this is the way in which the Progressives seem unable to distinguish between the rhetoric of the Bush administration and its reality. (One could make the same point about the paucity of Progressive protests against the reality of the expanded military adventurism we’ve seen under Obama.) The left prides itself on being able to see through the rhetoric of capitalism’s defenders and practitioners to their supposed real agenda. But the critical facilities they claim to bring to the private sector seem to disappear when the salesman is a self-described conservative.

If the left would spend more time deconstructing the rhetoric of the Bush administration and looking at its actual behavior, rather than simply accepting what its spokesmen say they believe, the left might realize that its diagnosis of the economic disease is deeply flawed and has resulted in a prescription that is really just more of the same poison which caused the illness in the first place.

  • Steven Horwitz was the Distinguished Professor of Free Enterprise in the Department of Economics at Ball State University, where he was also Director of the Institute for the Study of Political Economy. He is the author of Austrian Economics: An Introduction.