No sense wasting too much of this year-end report on what you already know. The financial sector is back from the brink; the largest banks are able to raise capital and earnings sufficiently to repay their government bail-out loans and have enough left over for generous bonuses. Share prices have recovered half of the ground lost since they peaked. Consumer spending is up a bit. Sales of existing homes are at close to a three-year high, but a large supply of new homes gluts that market. The job market seems to be improving, but the unemployment rate is in double digits, and almost 40% of those out of work have been jobless for 27 weeks and longer. The American health care system is to be overhauled, with the 17% of the U.S. economy it represents to be firmly under government control. Ben Bernanke is to be confirmed for another term as chairman of the Federal Reserve Board while he figures out when and how to drain liquidity from the system. And President Obama, although still popular, has seen his popularity rating drop below that of Bill Clinton and George W. Bush at this time in their presidential careers.
So much for what is obvious even to the casual observer. Less obvious are some important changes that are likely to be with us long after the current recession is history.
For years, perhaps decades to come, Americans will be whittling away at the mountain of debt the Obama administration has built, in part to apply Maynard Keynes’s nostrums to the sagging economy, in greater part permanently to expand the size and role of government. On the day before Christmas, immediately after its dawn vote to pass the health care bill, when few were watching, the Senate joined the House in raising the debt ceiling so that the administration could borrow enough money — $290 billion — to keep the government running, but only for a few months, so great is the amount of red ink pouring onto the federal books.
Congress is also preparing a second stimulus bill — it will have a different name — and instead of using the money flowing in from the banks to repay the government’s bail-outs to reduce the deficit, the president and Congress are converting it to a slush fund to be spent on a variety of new programs. Throw in the fact that no one believes the health care bill will not add to the deficit, and Americans will remember 2009 as the year they loaded huge burdens on their children and grandchildren.
They will also remember 2009 as the year that class warfare reared its ugly head in a country long free of the political divisions associated with that European disease. Of necessity, the government devoted its resources to bailing out Wall Street, while the unemployment rate, house foreclosures and repossessions, and hard times hit Main Street. No use explaining that the financial system had to be saved so that it could again extend credit to small businesses and worthy consumers, not when the bankers, having been saved by the taxpayer, used the first sign of profits to vote themselves enormous bonuses for, according to the head of Goldman Sachs, doing “God’s work.” Little wonder that the president sees political profit in using his bloody pulpit to attack “fat-cat bankers.”
The good news is that this “us-versus-them” attitude, emerges periodically in America — Teddy Roosevelt attacked “malefactors of great wealth” and his cousin Franklin claimed that “unscrupulous money changers stand indicted in the court of public opinion” — but rarely survives after needed reforms are made. Unfortunately, we now have the toxic combination of extraordinarily insensitive bankers, a president determined to “transform” American society, a swollen army of government employees and other dependents on it, and congressional leaders sufficiently to the left of mainstream America to make it uncertain that envy can once again be pushed to the margins of American political life. Be afraid, be very afraid.
The year ending also saw first signs of a permanent change in the relationship of government to the private sector. The most obvious, partly because it is bankers’ pips that squeak the loudest when squeezed, is the new role of government in setting compensation. True, the “pay czar’s” remit is technically limited to certain employees of financial institutions that are in hock to the government, but in fact his decisions are affecting the pay patterns in the entire financial sector. Meanwhile, government appointees are changing the way General Motors does business, with effects even on Ford, which refused to suck the government teat. And health care is not the only industry to be completely transformed by government. Energy is next on the list, now that the Environmental Protection Agency has the power to control CO2 emissions and therefore to determine who may use what sorts of energy and in what amounts.
2009 might also be remembered as the year in which the dominant role of the dollar in world trade came to be challenged. China, Russia, Venezuela, and several other nations would like to see the dollar replaced as the world’s reserve currency by some sort of international currency such as drawing rights of the International Monetary Fund (essentially, a basket of currencies). Or, whisper it softly in the posh restaurants of Brussels, the euro, assuming it survives the pressures of further downgradings of the credit ratings of Greece and other eurozone members.
Finally, this was a year that marked the rout of the economists. Their failure to foresee the coming recession and near-collapse of the world financial system did not do much to enhance the always-spurious claim of the profession to be just another of the sciences. It isn’t, never was, and never will be. But many economists pretended that their models mirrored reality — that markets always operate on perfect information provided by perfectly rational consumers, catered to by lenders capable of measuring risk. Students of the institutions that make up an economy, and the culture that underlies economic behavior, were buried under a mass of mathematics, and are only now emerging. Economics still has much to teach us, but only after a major re-think by its practitioners, and then not as a substitute for good, common sense of the sort that careful readers of such greats as Adam Smith, John Maynard Keynes, and Joseph Schumpeter will find useful.
Next we’ll take a look at what all of this means for 2010 and beyond. Meanwhile, I would like to thank the readers of these pieces for your interest in it, and your patience with its errors, and the Hudson Institute’s Astha Shrestha for her unfailingly prompt responses to my data requests.
Irwin M. Stelzer is a contributing editor to THE WEEKLY STANDARD, director of economic policy studies at the Hudson Institute, and a columnist for the Sunday Times (London).
