Causes and Lessons of the Current Economic Crisis

By Michael Federici for FRONT PORCH REPUBLIC

ERIE, PA. As a new contributor to the Front Porch Republic, I would like to thank Mark Mitchell for his invitation to participate in what is shaping up to be a thoughtful exchange of important ideas.

My April contribution is the result of a panel debate held at Edinboro University in Pennsylvania regarding the current economic crisis. I was asked to participate on the panel because I am known as an intellectual conservative. It was apparent the evening of the debate, and it seems to be the case with the Front Porch Republic, that categories like “liberal” and “conservative” require qualification and clarification. Why?

For one thing, intellectual conservatism is not a monolithic community. At its best, it treasures genuine diversity and deplores a stale uniformity that tends to characterize much of today’s politics. This is partly why many conservatives refused to defend the economic policies of the Bush administration that violated both the principles of sound economics and the prejudices of traditional conservatism.

My reaction to our recent economic troubles is influenced by several thinkers who are known less for their technical contributions to the field of economics than they are for their imaginative conception of economic life. They include: Wendell Berry, Wilhelm Röpke (A Humane Economy), Joseph Schumpeter (Capitalism, Socialism and Democracy), E. E. Schumacher (Small is Beautiful), Karl Polanyi (The Great Transformation), and Pope Leo XIII (Rerum Novarum).

What they share in common, and what Americans in general seem to have lost, is a concern for a humane scale and thus what Röpke calls the humane economy. Röpke’s book by that name is an excellent starting place for understanding what he considers a third way or middle path between the statism of totalitarianism, socialism, and the welfare state and the economic anarchy of libertarian capitalism or neoliberalism. Both extremes cause what Röpke called the “enmassment” of society. Whatever the shortcomings of my arguments, my purpose is to join Röpke in advocating a humane economy, and Schumacher in insisting that the humane requires attention to the problem of scale. Generally speaking, small is apt to be more beautiful and more humane than the scale of mass culture.

Because the humane and human scale are my standards, I part company with those on the left, like Keynesians and the Obama administration, who tend to argue for big government as the solution to the economic crisis. Generally speaking they believe that more government control of the economy, property, and wealth will lead to a more just and a less volatile economy. Their tendency is to view economics through the prism of classes and egalitarianism and to use economic policy as a means to develop social policy.

Both the Bush and the Obama administrations have responded to the recession by assuming that significant government intervention in the economy is the correct approach to cure the sick economy. Unlike President Obama, I see little evidence that a new New Deal, a Keynesian approach, will work in helping the economy recover. Even if it can work in the sense of bringing economic recovery sooner, I have problems with its consequences. As Wendell Berry argues, efficiency and wealth are not the greatest goods. Science and technology, if divorced from a concern for the humane, can alienate individuals from community and dignified work. Robert Nisbet calls such people “loose individuals” because they have been ripped from social institutions that have a civilizing and harmonizing effect. Polanyi’s notion of “embeddedness,” (i.e., the economy does not exist outside social, political, and religious community) is a reminder that economics is merely one dimension of several inseparable aspects of human life. The unintended consequences of grand economic policy may include multiplying the number and degree of loose individuals.

I also, however, part company with big business conservatives, neoliberals, and libertarians who cling tightly to unfettered capitalism and who tend to believe that economic efficiency is one of the primary objectives in human life. The notion of a “free-market” is an abstraction that tends to obscure the reality of life in its many dimensions. Moreover, as Burke might have argued, we ought to know what individuals are going to do with their economic liberty before we give license to it. The fruits of economic liberty must be measured against the standards of the good life. Like Röpke, I believe that there is a third way, a middle path that centers economics on community and the spiritual character; it leads to the humane economy and more complete human beings. In short, the mass economy is dehumanizing.

As a general principle, I oppose big government bailouts of big companies and industries that behaved irresponsibly. Both John McCain and Barrack Obama supported President Bush’s bailouts because they argued with most other American political leaders that we cannot afford to let AIG or other companies fail. If they fail, we were told, the economy will fail.

What sense does it make, in the first place, to allow companies to get so large that the economy cannot survive without them? In my view neither business nor government should concentrate power. The American Framers defined concentrated power as the very definition of tyranny (Federalist 47). We have lost sight of this enduring wisdom and need to remind ourselves that bigger is not always better. We would do well in the current environment to revisit Schumacher’s and Berry’s arguments for a smaller scale in economic life and to remember that mass society breeds not the beautiful but the ugly. James Howard Kunstler’s work provides numerous illustrations of the ugliness and vulgarity of mass society.

Part of the problem is that there is a tendency to view the economy as a machine that government can control by pushing the right levers. Economics, however, is not a science at least in the way Keynesians think it is. When I was an undergraduate studying economics, we performed economic computer modeling that required mathematical exactness to “fix” the broken economy. We were given certain conditions and numbers regarding unemployment, inflation, interest rates, etc. and had to adjust interest rates, taxes, or government spending accordingly. When we did, the numbers were plugged into the computer and the results were formulaic. Such exercises condition the imagination to conceive economics in a way that divorces it from the texture of concrete human beings and communities. Unintended consequences, like the loosening of individuals or ugly commercial development, tend not to be part of Keynesian economic models.

Economies don’t work like machines; they do not exist in a realm of mathematical abstraction and certitude. And yet both past and current economic policy makers act as though they are mechanics working on a great economic engine. In the year or so leading up to the 1929 stock mark crash, government cut the money supply by one-third. In the current economic crisis, President Obama assured us that we will see progress in employment numbers, if his stimulus plan is working because he accepts the Keynesian belief in government’s ability to manage economies. It is worth remembering that when FDR came to office he faced double digit unemployment. After seven years of the New Deal, unemployment stood somewhere between seventeen and twenty percent. We were led into this economic mess in large part because of reckless spending; we will not find our way out by spending in an even more reckless way.

It should be remembered that like so many things in life, recessions have a life of their own. Although they do not follow as clear a pattern as the weather, the winter of recession is always followed by the spring of recovery. This recession will be no different. This does not mean that nothing should be done while we wait for recovery, but it does mean that we need to realize that only part of life, including economic life, is in our control. Some things get better on their own, others require a bit of nudging or even aggressive action. When a gallon of gas was more than four dollars a year ago many screamed that government should do something. Government didn’t do much of anything and the price dropped to two dollars a gallon. Our economic well being should not be left to market forces alone, but we also need to acknowledge that, like the weather some things are out of our control and it is possible to make a bad situation worse by trying to do more than is humanly possible. It is possible, as some have argued, that Keynesian policies deepened and lengthened the Great Depression. Hubris feeds the desire to control the uncontrollable; it fosters an impatience with things as they are that often leads to rash and imprudent public policy. At its extreme this disorder takes on a gnostic dimension and attempts to change not merely existing public policy but the very order of being in which we live.

It is a mistake to repeat the New Deal strategy and use the economic crisis to engage in grand social engineering. President Obama indicated in his 2009 State of the Union Address that he wants to:

a) End the Iraq War
b) Accelerate the War in Afghanistan
c) Fix the Economy
d) Fix Healthcare
e) Clean up the environment
f) Fix Social Security
g) Fix Medicare
h) Rebuild American infrastructure
i) Create a new energy policy
j) Reform American schools
k) Cut the budget deficit
l) Rid the federal government of fraud and waste, and make the federal budget more transparent

The president said that he wanted “to ensure that a crisis of this magnitude never happens again.” Like FDR he declared war on the broken economy, a war apparently to end all major recessions. Such attitudes move beyond policy reform to what Eric Voegelin calls metastatic faith, i.e., an unrealistic belief in the transformation of human nature and human society.

George Bush exploded federal spending and doubled the national debt in eight years. If massive government spending was good for the economy, we wouldn’t be debating what to do about the economic crisis.

The danger of creating new government programs is that, like with the New Deal, they become entrenched whether they work or not. They burden future generations of Americans just as the Wars in Iraq and Afghanistan have. We seem to have come to our senses about Iraq and realized that we can’t create a viable democracy in a culture that does not possess the prerequisites for constitutional government. The same kind of realization is necessary when it comes to big government and the welfare state. The War on poverty did not end poverty, as it promised; the war on drugs has not ended drug use in America; the war on terror has not ended terrorism; the world wars were not able to end all wars. These are promises engendered by metastatic faith.

The current economic crisis is not so much a problem of public policy as it is a problem of imagination. If we continue to conceive of politics as the answer to all or most of our needs, then we will repeat the mistakes of the previous century and rest our hopes in institutions that are led by individuals who are men and women, not gods. We should help those who are struggling in the current economic climate and take greater responsibility for our communities rather than turn reflexively to government. It may be that a Wendell Berry novel contains more wisdom about economic life than a room full of government economists. If forced to choose, I side with Berry, Röpke, and Schumacher and place my emphasis on returning to a humane scale in both government and the economy.

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