For whose benefit are the current economic policies designed?

One of the mysteries of governmental responses to the current financial crises in the US and Europe has been the call for more austerity and belt tightening, even at the risk of social turmoil. One would think that the natural tendency for policy makers fighting a depressed economy is for increased government spending to stimulate employment and growth. And yet we hear endless blathering about the importance of balancing budgets and closing deficits, by which is meant cutting social programs that benefit the majority rather than cutting spending on defense or raising taxes on the wealthy.

While one can blame this broadly on the nature of oligarchic power that does not really care that much about the unemployed or the misery of the 99%, Steve Waldman gets more specific in his diagnosis of what is driving this behavior. He says that it arises from the desire to protect the purchasing power of creditors by avoiding inflation at all costs.

But the preferences of developed, aging polities — first Japan, now the United States and Europe — are obvious to a dispassionate observer. Their overwhelming priority is to protect the purchasing power of incumbent creditors. That’s it. That’s everything. All other considerations are secondary. These preferences are reflected in what the polities do, how they behave. They swoop in with incredible speed and force to bail out the financial sectors in which creditors are invested, trampling over prior norms and laws as necessary. The same preferences are reflected in what the polities omit to do. They do not pursue monetary policy with sufficient force to ensure expenditure growth even at risk of inflation. They do not purse fiscal policy with sufficient force to ensure employment even at risk of inflation. They remain forever vigilant that neither monetary ease nor fiscal profligacy engender inflation. The tepid policy experiments that are occasionally embarked upon they sabotage at the very first hint of inflation. The purchasing power of holders of nominal debt must not be put at risk. That is the overriding preference, in context of which observed behavior is rational.

This preference is not at all difficult to understand. The ailing developed economies are plutocratic democracies. “The people” do have power, but influence is weighted in a manner correlated with wealth. The median influencer in these economies is not a billionaire, but an older citizen of some affluence who has mostly endowed her own future consumption. She would like to be richer, of course. But she is content with her present wealth, and is panicked by the prospect of becoming poorer. For such a person, the depression status quo is unfortunate but tolerable. The risks associated with expansionary policy, on the other hand, are absolutely terrifying.

Implementing policies that benefit rich older people. That sounds like my rant from two years ago against greedy old people.

Sheila Bair was former chairman of the Federal Deposit Insurance Corporation. Surveying the current economic policies that favor the big banks and other moneyed interests, she unleashes perhaps the most sarcastic attack ever penned by a former high government official, suggesting that the government offer money to ordinary people on the same terms that they have given the big banks.

Under my plan, each American household could borrow $10 million from the Fed at zero interest. The more conservative among us can take that money and buy 10-year Treasury bonds. At the current 2 percent annual interest rate, we can pocket a nice $200,000 a year to live on.

[M]y proposal won’t cost taxpayers anything because the Fed is just going to print the money. All we need is about $1,200 trillion, or $10 million for 120 million households. We will all cross our hearts and promise to pay the money back in full after 10 years so the Fed won’t lose any dough.

Because we will be making money in basically the same way as hedge fund managers, we should have to pay only 15 percent in taxes, just like they do.

This is America. Why should hedge funds and big financial institutions get all the goodies?

Her biting sarcasm lays bare the double standards at work. Matt Taibbi comments on her piece.

But it should be borne in mind that she is not saying that the Fed should stimulate the economy in ways that will benefit ordinary people rather than giving free money to big banks. Paul Krugman says that she is opposed to the Fed trying to stimulate the economy at all, for fear of creating a bond bubble.


  1. karmakin says

    That’s a really good article and should be required reading for people (especially young people) who are wanting to know about political realities and how best to progress.

    Most young people blame it all on corruption, when in reality there’s actually a sizable voting block (and an important one at that, as they tend to be fairly moderate) who are in support of things such as moderately high unemployment in order to hold down inflation, and bank bailouts and other general pro-bubble policies in order to protect their investments.

    There’s also the cultural matter of people who have, as their job power and control over other people don’t want to make that job harder, which a better job market will do.

  2. mnb0 says

    Sure this is excellent analysis. But it’s non-historical and thus incomplete. Especially The Netherlands provide a clear case.
    The crisis of the 30’s lasted nowhere as long as in The Netherlands. Dutch governments implemented a strict balancing budget policy. Dutch economy only recovered after German occupation, a recovery that lasted until about midst 1943.
    The same happened in the 80’s. The same happened about ten years ago.
    The Dutch simply never learn or so it seems. The current government, which thankfully has retired; there will be new elections, very much want to execute the most draconic cuttings ever.

  3. smrnda says

    I think the main issue is that the belief in economic libertarianism is a religion of fanatics, and the fanatics who support it have money and could care less what the social consequences of their beliefs are. You can probably thank Ayn Rand for making the belief that say, the rich are persecuted by the poor to be something that any person can actually say and really believe as she was really the person who popularized and legitimized it. Her ideas probably speak to very few people, but it speaks to the privileged who see the purpose of government to be solely protecting the interests of those with property. Any ideology with such a sacred view of property rights (which is funny that it took root in a nation of stolen real estate) views property and its ownership as the source of other rights, and therefore, under such a system, your rights are proportional to your property.

    couldn’t find it, but Gore Vidal had a good quote about her and her influence. he found it alarming that she was about the only author US politicians seemed to have read.

Leave a Reply

Your email address will not be published. Required fields are marked *