Too Much of A Good Thing.

            The Great Depression (1929-1939) rocked capitalism.  Conventional economic thought offered no useful response.  Indeed, following its dictates only made things worse.  It held that governments should not intervene excessively in the natural workings of the capitalist economy.  However, if the “natural workings” of the capitalist economy puts 25 percent of the labor force out of work for a long stretch, then something new needs to be done.  Some countries—the United States, Nazi Germany, Imperial Japan–fumbled towards an effective solution.  Government deficit spending would have to fill up the gap between what the economy wanted to produce and what it needed to produce to maintain employment and living standards.  This actually worked, especially under the conditions of total war.[1] 

            It took a while, but after the Second World War these ideas were legitimized as more than just ad-hoc emergency measures.  Labeled “Keynesianism,” the legitimized government interventions, especially deficit spending, as a response to serious downturns in the business cycle.  Along with expanded provision of government services, the new approach seemed to be validated by the “Great Boom” of the post-war decades.  Health, education, and living standards all improved markedly during this time.  British Conservative Prime Minister Harold Macmillan crowed that “most of our people have never had it so good.” 

            Inevitably, a fly lit in the ointment.  The fly took the form of consequences that were unintended, unanticipated, and frankly undesired.[2]  Success at dealing with major down-turns tempted democratic political systems to apply the solution to less grave down-turns and then to enhancing up-turns.[3]  This seemed to reflect the invalidation of yet another old nostrum: that deficits financed by just printing money eventually undermine confidence in the currency, eventually stoke inflation to unacceptable levels, and eventually force central banks to raise interest rates.  “Eventually” never put in an appearance, so governments began to get the idea that free money actually is free.[4] 

            Now—or maybe “again” would be more accurate—storm flags are going up.[5]  A “perfect storm” in a rare one that combines several meteorological events.[6]         Cassandras discern something similar developing in economic policies. 

First, printing money raises asset values (stocks and bonds, houses).[7]  That’s great, except that just under half of Americans own no stocks and bonds, and ownership of most stocks and bonds is highly concentrated.[8]  Although much played up by the left, economic inequality really has risen dramatically.  That threatens to de-legitimize capitalism in the eyes of ordinary citizens. 

Second, easy money and government bail-outs do more than curb the negative effects of a recession or depression.  They also curb the positive effects.  Governments step in rather than allowing “creative destruction” to re-allocate economic resources and rewards.  Inefficient, non-performing firms don’t get driven under.  These “zombie”[9] companies continue to tie down capital and labor that would be better directed to new firms that are more competitive, efficient, and innovative.[10]  The share of “zombies” among publically-traded companies has risen from about 2 percent in 2002 to 19 percent by 2019.  Pouring money into “zombie” firms doesn’t increase production or productivity by any significant amount.  Instead, “creative destruction” lies at the heart of functional capitalism.  So, let her rip. 

Third, easy money and bail-outs are a part (not the whole) of the forces that have created an economy dominated by big companies.  Big firms can borrow the money needed to get bigger still.  They can buy start-ups before they grow into real competitors; they can hoover-up talented workers; and they can hire the armies of lawyers needed to cope with the immense and complicated regulations generated by active governments.  Hug rewards flow toward a company that can achieve market dominance.  Stomping on ants may come to seem preferable to thinking about uncomfortable innovations. 

In essence, capitalism is being smothered by the efforts to shield people from risk and adversity.[11]  In theory, it is not necessary to throw out the original Keynesian baby with the bathwater to solve this problem.  Governments must still save the economy in cases of serious down-turns.  The problems lie, first, in what it does after a crisis and, second, what it does when times are good.  The schoolroom solution is that governments should exercise some self-discipline.  After a crisis they should reel back in the debt they issued to revive the economy.  When times are good, they should refrain from trying to make them even better by printing more money. 

The solution rests on a hope that voters or interest groups will reward politicians who follow this path.  That hope, in turn, rests on a belief in civic virtue and a sense of self-restraint.  Will voters and interest group virtuous and capable of self-restraint?  Or are they habituated to government stimulus?[12]  Maybe it will take a big smash-up to change minds.[13] 

That opens up a discussion about “culture” (values, beliefs, behaviors) that is bound to be difficult.  It would be easy to give into cultural pessimism here.  Still, there’s always been “a lot of ruin in the Republic.” 


[1] On all this, see: Charles P. Kindleberger, The World in Depression, 1929-1939 (1973); and Alan S. Milward, War, Economy, and Society, 1939-1945 (1979). 

[2] See Gregor Samsa. 

[3] In the United States, it isn’t possible to blame only the “tax-spend-elect” Democrats for this.  Purely for electoral reasons, Republicans eventually responded with “tax-cut-spend-elect.”  Their latest tax cut came in 2017, when the recession of 2008 hardly even appeared in the rear-view mirror.    

[4] Two “oil shocks” in the 1970s led to a severe inflation.  After central banks defeated this inflation in the early 1980s, they pushed down interest rates to low levels.  Asian “sovereign wealth funds” soaked up a lot of the US Treasury paper thus generated.  See: Jacques Rueff, The Monetary Sin of the West (1972) for its criticism of the US for inflating the whole world’s economy.  More to the point, Rueff’s views influenced French president Charles de Gaulle to attack the value of the dollar in 1965.  See: https://en.wikipedia.org/wiki/Exorbitant_privilege 

[5] Ruchir Sharma, “The Rescues Ruining Capitalism,” WSJ, 25-26 July 2020. 

[6] See: Sebastian Junger, The Perfect Storm: A True Story of Men Against the Sea (1997). 

[7] After Congress took flight from Keynesianism from 2008 on, the Federal Reserve Bank stepped in with “quantitative easing”: buying privately-owned financial assets to pump up their value. 

[8] Just over half of Americans own some stocks and bonds, but most stocks and bonds are owned by a few people. 

[9] Companies that don’t earn enough profit to pay even the interest on their debts. 

[10] On the very real  problems in Asia, see: https://en.wikipedia.org/wiki/Zombie_company 

[11] There may be a larger argument to be made about the other unintended effects of the post-war reforms on a broader range of citizens.  For example, Zachary Karabell quotes Alexander Brown, founder of the investment bank Brown Brothers (later Brown Brothers Harriman): “Don’t deal with people about whose character there is a question.  It keeps your mind uneasy.  It is far better to lose the business.”  Karabell, “The Capitalist Culture That Built America,” WSJ, 15-16 May 2021.  Reflecting on some of the comments I have read in my local township Facebook page, I think that you shouldn’t say things that would make Jimmy Stewart or Lee Marvin believe that you should have your mouth washed out with soap. 

[12] A question at the heart of the work of the “Concord Coalition.”  https://en.wikipedia.org/wiki/Concord_Coalition 

[13] William E. Leuchtenberg, Franklin D. Roosevelt and the New Deal, 1932-1940 (1963).