Monday, December 1, 2008

Putting the Bailout Into Context

The total bill for the bailout of the U.S. financial system is now widely estimated to be over $8 trillion-even by mainstream sources like

This is not all in the form of the straight hand-outs that have got so much attention, which actually form only a small part of the total. (The larger part of it seems to come in the form of loan programs and guarantees.) Nonetheless, they hint at a potentially vast final bill, and even if they do not, the sheer largeness of the sums is enough to give one pause.

For the sake of comparison, keep in mind that the country's defense bill for the years 1941-1946-essentially, what it cost to fight World War II-was a comparatively paltry $3.75 trillion in inflation-adjusted dollars.

Of course, even when adjusted for inflation, the fact remains that the U.S. economy today (at least going by official GDP figures) is about 9-10 times the size of the U.S. economy in 1940, so one could argue that proportionally the effort is smaller.

Nonetheless, this remains a very substantial commitment indeed, with few parallels in American history, and I have to admit that when I was thinking about whether or not the country really could handle the kind of economic strain that the Second World War imposed on the country (a line of speculation which drove me to write this article, which ran in the quarterly of the U.S. Army War College in 2004, a more developed version of which argument you can find in this newish piece, here on my site for the first time ever), it never occurred to me that the challenge would take this precise shape-even if I have long shared the worries of many dubious about the idea that trade deficits can be run forever without consequence, that it is a good idea to treat your house like an ATM, that any of what is regarded as the conventional wisdom (so conventional, so rarely wise) made the least bit of sense.

In writing that article back in 2003-4, I didn't pretend to have a hard and fast answer about how much strain the economy could take, much to the irritation of a rather smug, snide and amazingly repetitive business professor who didn't let missing the point of my article (that public finances were rather more constrained than in the World War II era, and that we could not count on the kind of post-war growth surge which proved essential to keeping the U.S. afloat despite the war debt, and the expenses of the subsequent Cold War) keep him from shooting his mouth off on a message board.

I don't pretend to have an answer now, and for that matter I'm not sure I know of anyone else who can give one. But where earlier I was astonished by how little people seemed to realize this isn't just another bit of "this quarter" news, by how the enormity of such numbers was failing to get through the short-termist superficiality prevailing in business journalism, I am now astonished to see the "D" word everyone usually steers clear of (they just say "worst [fill in the blank] since the 1930s") making appearances in the mainstream media, not least in this piece in the Los Angeles Times-penned by a Clinton-era deputy assistant secretary of the Treasury and professed neoliberal no less, one J. Brad DeLong-who incidentally finds himself recommending an old-fashioned Keynesian stimulus package.

Nor does it stop here. American coverage of the crisis is parochial as ever, but this is a global problem, and similar action is being taken around the world. Britain, too, has seen a nearly trillion-dollar bailout (relative to the size of its economy, almost as big as the one the U.S. is now seeing), just one country in Europe to do so, Germany engaging in a large venture of similar type, and the EU's finance ministers are now talking about a $250 billion stimulus plan, while Canada's opposing parties are proposing a similar measure. (Nor is the trend confined to the developed world. China is now poised to deliver a $600 billion stimulus to its own economy. India, more constrained by giant deficits, may follow suit in a more modest way.)

Earlier this year I saw an article by Ian Bremmer in the June issue of Survival titled "The Return of State Capitalism." My thought was that it was easy to make too much of the moves in this direction on the part of most of the relevant states. Russia and Venezuela, for instance, could do what they liked because of high oil prices, while China's size makes it exceptional, and in any case, the trend there has long been toward more open markets. Besides, this kind of movement historically, as Harold James wrote in The End of Globalization, depends on a clearly articulated, alternative idea taking hold (and appearing to operate successfully in) a major state (like Bolshevik Russia or Nazi Germany), and that certainly has not been the case to date.

Now I am beginning to wonder. While the American version of bailout looks like just another corporate giveaway Kevin Phillips charges in books like Wealth and Democracy and Bad Money has been routine since the 1980s (despite measures that look an awful lot like nationalization), the bailouts in Britain and Germany (while those countries remain ostensibly devoted to increased privatization) give government more control over the institutions in which they are investing. And some of the stimulus packages proposed or even underway outside the U.S. have a more classically Keynesian quality to them.

Are we seeing the beginning of a tectonic shift in economic thinking, the sidelining of the Thatcherism that has served the world so poorly in these last, anemic decades? Perhaps. But their end has been announced many a time before, each time prematurely, the latest round of free-market mania having proved its durability beyond every expectation. And sticking the major governments with so much debt can play right into the hands of advocates of "starve the beast" fiscal policy of the kind Thomas Frank described in his recent book The Wrecking Crew. Might the repeal of Social Security end up happening on Barack Obama's watch?

I hope not, but I wouldn't rule it out.

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