Robert J. Shiller: Everybody Calm Down. A Government Hand In the Economy Is as Old as the Republic.

Posted by Kendall Harmon

It has become fashionable to fret that the current crisis on Wall Street marks the end of American capitalism as we know it. "This massive bailout is not the solution," Sen. Jim Bunning (R-Ky.) warned Tuesday. "It is financial socialism, and it is un-American." It is neither. The near-collapse of the U.S. financial system and Washington's sudden and massive intervention to try to shore it up certainly mark a major turning point, but a bailout would represent a thoroughly American next step for our economic system -- and one that will probably lead to better times.

Americans may assume that the basics of capitalism have been firmly established here since time immemorial, but historical cataclysms such as the Great Depression strongly suggest otherwise. Simply put, capitalism evolves. And we need to understand its trajectory if we are to bring our economic system into greater accord with the other great source of American strength: the best principles of our democracy.

No, our economy is not a shining example of pure unfettered market forces. It never has been. In his farewell address back in 1796, 20 years after the publication of Adam Smith's "The Wealth of Nations," George Washington defined the new republic's own distinctive national economic sensibility: "Our commercial policy should hold an equal and impartial hand; neither seeking nor granting exclusive favors or preferences; consulting the natural course of things; diffusing and diversifying by gentle means the streams of commerce, but forcing nothing." From the outset, Washington envisioned some government involvement in the commercial system, even as he recognized that commerce should belong to the people.

Capitalism is not really the best word to describe this arrangement. (The term was coined in the late 19th century as a way to describe the ideological opposite of communism.) Some decades later, people began to use a better term, "the American system," in which the government involved itself in the economy primarily to develop what we would now call infrastructure -- highways, canals, railroads -- but otherwise let economic liberty prevail. I prefer to call this spectacularly successful arrangement "financial democracy" -- a largely free system in which the U.S. government's role is to help citizens achieve their best potential, using all the economic weapons that our financial arsenal can provide.

So is the government's bailout a major departure? Hardly. Today's federal involvement offers bailouts as a strictly temporary measure to prevent a system-wide financial calamity. This is entirely in keeping with our basic principles -- as long as the bailout promotes, rather than hinders, financial democracy.

Read it all.

Filed under: * Economics, Politics • Economy • The September 2008 Proposed Henry Paulson 700 Billion Bailout Package

3 Comments
Posted September 28, 2008 at 6:08 am [Printer Friendly] [Print w/ comments]



1. Sick & Tired of Nuance wrote:

Everyone calm down and accept the hyperinflation be are about to start.  The transfer of wealth from people to the government will begin on schedule.  Move along, nothing to see here…

September 28, 8:25 am | [comment link]
2. Craig Goodrich wrote:

This is the kind of extremely tendentious reading of history we have come to expect from the Post.  One of the purposes of the new Constitution was to resolve interstate commercial disputes and prevent the several States from applying tariffs against each other.  Hamilton and the Federalists also saw a role for the Federal Government in financing improvements in roads, harbors, canals, and so on, but bear in mind that at this time Federal revenue derived almost entirely from tariffs and excise taxes (the tax on whiskey was the cause of the Whiskey Rebellion; the farmers of mountainous Pennsylvania preferred, for reasons of transportation cost, to market their corn in distilled form).

The “American System” promoted in the early 19th century most famously by Clay and Calhoun was regarded as grandiose by many, and resented by the South, which regarded it as a way for the northern states, where most of the improvements took place, to steal the wealth of the southern states, where most of the export goods—cotton and tobacco—were produced.  They well understood that heavy tariffs increase the cost of imports, which in turn reduce the volume of exports.

But in any case, even at its most extreme, this American System was founded on a Federal Government that was minuscule compared to the national economy of the time—total taxes, Federal, State, and local amounted to on the order of 5% or less (and that mostly State and local) until the Civil War, and never rose above 10% until World War I.  It is now over 40%, the lion’s share Federal.

So yes, indeed, the scale of this bailout is completely unprecedented in American history.

September 28, 10:31 am | [comment link]
3. DonGander wrote:

Everybody calm down - we are about to enter a 1930’s style government manipulated capital freeze.

We are in this thing because it was the governments policy to stimulate the economy. Now, overstimulated as we are, the answer is yet more stimulation. Folks, this scheme can’t last forever. When buisness begins investing as a hedge against inflation, government will no longer be in control of our feelings.

Don

September 28, 3:04 pm | [comment link]
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