The Depression that Hayek Built
To read the British press is to realize how fundamental the failure the theory of libertarian economic thinking has been. In this theory, the wealthy possess a special insight into the allocation of capital, and governments should abandon their role in allocating effort to a small extremely wealthy elite. It was a theory adopted by Iceland, which was lauded for its open laws and "flat tax." It was adopted by Lithuania, and to a lesser extent, by Spain. One country that embraced this idea more than any other, was Ireland, which took neo-liberal policies as virtually a doctrine. It attracted 40% of all American direct foreign investment in Europe, which liked it’s educated English speaking population, proximity to the UK, and low prices. For its part, the government of Ireland threw the doors open. As the Guardian reports by piecing together individual stories the plunge has been swift and dramatic. A new Irish diaspora has begun, as the weight of debt and the utter absence of an internally driven capital system, leaves behind the husk of an economy.
What created this collapse was the pure corruption at the top. A corruption seen in the expenses scandal now unfolding in Great Britain is destined to topple the ruling New Labor party — as was seen in the borrowing binge of the very wealthy in Ireland. These two pieces are not unconnected: the culture of flowing money lubricated politicians, who naturally saw that its continuation was essential for their own secure life style. This is not an issue of left or right in the context of the age. There was no left, merely a right that wanted slightly more of the money to flow to socially useful causes.
The aftermath? Spanish unemployment hits 17.4%, that is not a mistake. It is a number that is associated with the Great Depression, or the devastation of the post-war era. An economic bomb has hit what was a go go periphery. Ireland’s economy is projected to contract by a total of 9% this year, with the decline extending into next year.
These however, are the branches. The trunk was the United States and a banking system that packaged revenue flows into securities, and these were then used as a loose paper money which London turned into investment vehicles. The grunt work was outsourced to Ireland, the holding of the small amounts of reserves to Iceland, and Spain became the vacation spot. The roots, however, are in the vast control of wealth which is not in the hands, by and large, of Americans. While banks enabled these flows, they were not the source of them. Instead there were a large pool of investors seeking government returns. That is absolutely secure.
Now if you stop to think about it, that means something. If people want government returns, then there is demand for the kinds of investments that governments, and only governments, can provide. That is to say: public goods. If the investment demand had wanted really to invest in capital, it would have taken on more nominal risk.
What this means is that the fight, in economic ideology, was over how much of the investment in the future should be handled by a very wealthy elite, and what fraction should be handled by the public through government. The ideology of the time was that the wealthy elite, beyond defense and macro-economic stabilization – loosely speaking, making sure the good times kept rolling with low inflation and high money supply growth – was always right, and the public was always wrong. This theory has been proven false. The economic destruction of the New Depression, and Depression is the correct word, will extend for years, and has wiped out the fictional gains of the last 30 years. We are now exactly where we would have been without this experiment in a dictatorship of the propertariat, and we have nothing to show for it but a surplus of posh apartments and private jets. The debt is not in money. The numbers being thrown around represent real work by real people and real sacrifices, to pay back that pool of money. It, and only it, has been declared to be off-limits. The theory of the day is that the rich own the world, and governments only rent it from them.
Economic statistics on the percentage of Americans upside down in their homes, unemployment numbers, GDP numbers, do not reflect the reality of what these numbers mean. It is possible to dissect the recent Bureau of Labor Statistics release and see that private sector employment continues to collapse. 611,000 private payroll positions disappeared in April, and the number for the private sector was revised upwards for March. The slowing is taken as indicating an end to the freefall, because usually it has. However the damage is continuing at this pace, and will continue for some months. The nominal bottom of the downturn is not far away, but the upturn is not for a long time after that. Estimates vary, but many put the return of substantial growth for the US only at the end of this year.
The scale of this fall underlines what Bush and his regime thought was going on: 9/11 represented the chance for a "conservative World War II." A carte blanche to remake the US economy by shifting effort, permanently, to conservative projects and conservative priorities with conservative social structures. We have not seen such a large down shift in the economy, in terms of people employed, since World War II; with the next months data, we are going to fall through the recession of the late 1950’s.
However, to have public investment, the public must demand that investment. In his poetic post on words Glenn Smith pointed out that ideas are stories, and the conservative story, of a world economy based on small luxuries, greed, and a blunt trauma to anyone who would not accept that world order, was fundamentally unworkable as a narrative. It leads today, as it led in the age of Pericles, to hubris and collapse. Masaccio was far more brute, pointing out that if there is no one to carry ideas, then they will die. The beginnings of this project are happening, but far from the light. Darcy Burner, for example, has been given pennies to start working for progressive ideas in a foundation. She has less in seed money than the private jet budget of some Republican congressional campaigns. And this is only one example.
The theory of the last 30 years was that a rich elite would always know better how to allocate capital than would others. Every neo-liberal economics text on "welfare economics" spends time pondering about situations where more money would be created, but most would go to the wealthy; and then deciding that this is a good policy, because we could then tax the wealthy. This turns out not to be the case, because the money created was never real, in the sense of allocating resources, but a fiction. And while it existed, the wealthy could easily bribe a few members of parliament, a few government officials, not to tax it for welfare purposes.
This collapse leaves a void in the minds of elites, and a directionless moment in thought and government. The public wants action, but even those well intended, do not know what to do. Indeed the likelihood is that the political developed world will follow Canada, France, and Germany in ousting parties of the neo-liberal left, and installing neo-liberal right parties out of disgust. This means that the project of change is not won in an election, or by faith in particular individuals. And the economic crisis, like depressions before it, leads into a long and uncertain darkness, with a continuing need for action today, tomorrow, and many tomorrows after it.
Ideas, the right likes to say, have consequences. Look around you and see the consequences of theirs.