No matter what deal is cut today between Paulson and the Democrats on one side, and conservative Republicans on the other — politics does indeed make strange bedfellows — market capitalism as practiced in the United States will never be the same. More precisely, it won’t be the same for a very, very long time.
We are witnessing a radical modification of capitalism. Some of this is obvious. We know that the old view that some banks are too big to fail has been augmented by the view that some financial institutions are too interconnected to fail.
So Freddie Mac, Fannie Mae, AIG and others are bailed out by one device or other, although no depositors were directly threatened by the demise of these institutions.
Economist Allan Meltzer might be right when he says, “Capitalism without failure is like religion without sin.” But it seems safe to say that our tolerance of failure is just not what it used be.
But the change in policy towards failure — the greater willingness of policymakers to risk moral hazard in order to reduce risks of threat to the financial system — is only one of the changes that are reshaping market capitalism.
Another is an increased dissatisfaction with the way incomes are distributed. The picture of executives of failed companies strolling off with multimillion dollar bonuses has made more and more people wonder whether what goes on in the nation’s boardrooms is a search for ways to reward stellar performance, or a meeting of cronies to decide how to cut up the pie, far from the view of the shareholder-owners of the company.
More important is the fact that globalization, which along with free trade has done more to alleviate world poverty than all the misbegotten foreign aid programs combined, is now producing results that are seen as unacceptable.
Over one billion workers in India, China and elsewhere have entered the world labor market, putting pressure on the wages of low and not-so-low income workers.
At the same time, globalization has expanded the canvass on which skilled managers can paint. That makes them more valuable, and higher-paid.
This is not the place to resolve the dispute over whether the non-rich have done well or badly in recent years. Suffice it to say that the benefits of free trade — the t-shirts and sneakers in Wal-Mart, the rising living standard of developing-country workers — are less obvious than the costs.
The perception that trade has inflicted collateral damage on innocent bystanders has taken hold sufficiently to allow Barack Obama to attack trade-opening measures, and to force John McCain to promise training and other programs to soften its consequences.
Neither believes the market should be allowed to sort things out, despite America’s record of creating millions of new jobs every year.
Add suspicion over executive salaries, ostentatious displays of wealth by some hedge fund and other financial types, pressures on real wages of ordinary workers, the feeling that free trade is not fair trade (somehow defined), and you have a cocktail that might prove lethal to the concept of markets into which government should intrude only minimally.
Instead we have a capitalism in which financial institutions trade freedom for the protection of access to the government’s balance sheet (Goldman Sachs and Morgan Stanley).
In which institutions under stress — Lehman Brothers being an exception — accept pervasive government regulation in return for insurance against failure.
In which the advantages of free trade are sacrificed in the interests of preserving jobs in industries best left to adjust to the winds of change.
In which regulation of executive salaries is seen as a necessary political price to pay for preventing systemic failure of the banking system.
In which taxes on the “rich” and not-so-rich are seen as necessary to offset the inequities of the income distribution system created by capitalism as we have known it.
None of this is meant to do more than catalogue the changes that are occurring far from the glare of the headlines that report day-to-day fluctuations in markets, and in the state of mind of the Congress, the Secretary of Treasury, the President, and the rivals to succeed George W. Bush.
Those changes will undoubtedly deny us of some of the benefits of the creativity and dynamism of a capitalism in which failure was a greater goad to achievement. Sic gloria transit mundi.
Examiner columnist Irwin Stelzer is a senior fellow and director of the Hudson Institute’s Center for Economic Studies.
