One of the most pervasive findings in social science, although it is seldom codified this way, is how suggestible people are. Numerous studies in behavioral economics have found that the same underlying bet elicits very different take-up rates when framed as a wager versus as insurance. Even worse, humans are susceptible to obviously exogenous influence.
One oft-repeated test that yields consistent results is to ask a group in a classroom setting to (among other things) to write their best estimate of the number of countries in the world. To show how to fill out the form, the leader spins a wheel of fortune, and takes the chosen number, (say 550) and uses it to illustrate how to record the estimate. Invariably, high results on the wheel of fortune, clearly an arbitrary figure, lead to markedly higher average estimates on the form.
The question du jour is why does the US have such a phobia regarding nationalization. Per the lead-in, I suspect it has a great deal more to do with social conditioning than a case-by-case assessment of possible gains and losses.
While the initial (correct) reflex is that undue government interference in a well-functioning private sector is not a good idea, the industries in question (financial services and automobiles) have top players that are now abject failures on taxpayer life support. These companies have been exempted from market discipline (aka bankruptcy) thanks to state intervention.
The very fact that they operated with minimal government oversight, drove themselves to the verge of bankruptcy, and managed to make themselves so essential that they cannot be permitted to collapse says they cannot be left in their former hands (incumbent management is either colossal incompetent, amazingly corrupt and scheming, or both).
But unlike the UK, and Sweden during its early 1990s crisis (widely touted as best practice) which were both ready to assume control of banks that wrecked themselves, the US continues to rationalize, nay, promote, the worst of all possible worlds: socialization of losses, the bozo management teams still largely (often entirely, as in the case of Citigroup) intact, inadequate to no supervision (where are the board seats?) and no upside participation, not even much explanation of what they intend to do with the dough (well, now great theater is being made of the auto industry, because it is easy to pick on guys from the grubby Midwest, but the banking crowd, which did far more damage and has gotten much bigger handouts and no unpleasant questions).
I saw a simpleminded but compelling explanation for this phenomenon: Europeans consume more government services than Americans do, and are pretty happy with it (they think we are barbarians for having private health care and, among other things, little state support of the arts). Why? They are reported to be better at it than we are. They deliver government services efficiently (relatively speaking, and healthcare provides some proof) and because they do a good job, the citizenry is willing to deploy tax dollars to these ends.
That is a long-winded way of saying that government inefficiency and incompetence is not a given, as is often depicted in the US. The demonization of government service has probably discouraged able people from seeking public sector jobs. Even so, some areas still get high marks (the FDIC). And the continued disparagement of government serves as cover for those who want subsidies and rescues but hope to avoid the demands that should properly go with them.
This New York Times article deals with the Obama team’s reluctance †o be seen as “nationalizing”. I see. So we would rather pander to the bankrupt ideology that helped create this mess, let the perps continue to get undeserved princely pay, and stick the hapless sop taxpayer with the guaranteed-to-be-rotten fruit of this exercise rather than demonstrate leadership and reframe the issues. The hesitation to demand even modest quid pro quos is beyond belief. No private sector negotiator would ever accept such a deal.
Is this “Change We Can Believe In?” Looks like the same old crap to me, with better salesmen in charge.
The golden rule is that he who provides the gold, makes the rules. Time to get over prostrating before the private sector when it has abjectly screwed up.
Key excerpts from the New York Times:
When President-elect Barack Obama talked on Sunday about realigning the American automobile industry he was quick to offer a caution, lest he sound more like the incoming leader of France, or perhaps Japan.
“We don’t want government to run companies,” Mr. Obama told Tom Brokaw on “Meet the Press.” “Generally, government historically hasn’t done that very well.”
Yves here, Rubbish. Sweden did a great job with its bank takeovers. The Australian air control system is so good they have marketed the technology (and Australia also has a government applied science think tank which has provided considerable tangible support to industry). The US may not be good at overseeing private businesses, but that does not mean that government control and rationalization when industry has failed is always and ever a disaster. But if you have low expectations, you are pretty unlikely to exceed them.
Back to the Times:
But what Mr. Obama went on to describe was a long-term bailout that would be conditioned on federal oversight. It could mean that the government would mandate, or at least heavily influence, what kind of cars companies make, what mileage…It all sounds perilously close to a word that no one in Mr. Obama’s camp wants to be caught uttering: nationalization….
The fact that there is so little protest in the air now — certainly less than Mr. Truman heard — reflects the desperation of the moment. But it is a strategy fraught with risks.
The first, of course, is the one the president-elect himself highlighted. Government’s record as a corporate manager is miserable, which is why the world has been on a three-decade-long privatization kick, turning national railroads, national airlines and national defense industries into private companies.
I have not made a systematic study, but ample anecdotal reports suggest that Bush era efforts at privatization lead to much higher costs and no improvement in service delivery. So the simple-minded view that the private sector is ever and always more efficient bears some examining.
Mind you, I am NOT saying that nationalization should be a first choice, merely that being squeemish where it is clearly the logical action is silly. The article similarly raises straw men: Who would have the insight to fix the industry? Please. This is a reflection of a lack of will. The toughest issues are political: how to share the pain among the executives, the dealers, the shareholders, the creditors, and the employees/unions. The US did build a hydrogen bomb by marshaling fractious, world class scientists, and once upon a time did send a man to the moon, This is not as difficult, but cleaning an Augean stable does not get a lot of plaudits, so the right resources are not likely to be deployed.
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I’m very sympathetic to the ideas that there are inefficiencies that naturally arise in markets. There are always externalities, and bad equilibria exist. I also feel that government intervention can just as often cause market inefficiencies as address them.
That’s of course no argument not to wipe up a mess once it’s clear one exists, which I think is the thrust of your post here. I agree. But wiping up a mess can itself still cause problems: moral hazard reinforcement, seeing a crisis where there isn’t one, the collateral damage from unintended consequences, and attempting to solve problems that are simply too large.
I think we’re looking at a grade A example of both market failure and intervention to repair the market failure potentially exacerbating the problem. Booting out the management, while satisfying and probably a good idea, really doesn’t do much at this point, because the damage has been inflicted(though, I’ll admit, I’ve been repeatedly surprised by just how insular and brazen these fools can be, and how much more damage they can commit at the helm).
I find the only satisfactory answers in this situation to be ex ante: mind asset prices, don’t let anything get too big to fail, and don’t repeatedly use antibiotics (policy) on common colds so that the immune system gets stronger and you avoid creating resistant bacteria.
Nationalization will not make this problem go away, and your friendly deficit hawk is here to remind you that at some point interest rates will no longer be zero and that solvency issues can arise even if they are always zero. A consolidated balance sheet makes that much more apparent to our apparently doughty creditors. While we’ve all moved on from concerns about the dollar and national debt to Stimulus Now!, I don’t think those concerns are resolved, and they might rear their head again in the most unexpected way if rankled.
The only part of the Federal Govt that Yanks speak of proudly is the military (in my experience). Notwithstanding the great strides the US military has made since the seventies, I believe this to be the case because of guilt (they know deep down that this view is wrong – if government is, indeed “…OF THE PEOPLE, BY THE PEOPLE”)
CrocodileChuck
ndk,
The US has more or less taken the same liabilities as if it nationalized (look at the ever growing bailouts of Citi, AIG, and most assuredly Fannie and Freddie). The optics don’t change the substance. The US is taking on pretty much the same downside as it would in nationalization, why not get the upside and checks?
And not throwing out management INCREASES moral hazard.
They don’t throw out management because they are working for that management. That was true of Bush and his GS / Paulson Treasury. We’ll see if it’s true of Obama. The jury is still out. We will know him by his fruits.
The US has more or less taken the same liabilities as if it nationalized (look at the ever growing bailouts of Citi, AIG, and most assuredly Fannie and Freddie). The optics don’t change the substance. The US is taking on pretty much the same downside as it would in nationalization, why not get the upside and checks?
Well, I would have strongly preferred that we not take on those liabilities in the first place. But you’re right in that that ship’s largely sailed, so I’ll just point out that I think the optics do matter anyway.
For example, do you think someone whose house is being foreclosed upon by the bank would feel differently when it’s IndyMac Federal Bank, rather than those twits at IndyMac? I suspect they do, and this strikes me as a part of Sheila Bair’s motivation to do workouts whenever possible.
Or, do you think that taxation via invisible inflation and seigniorage is more palatable than targeted explicit tax raises? Volcker called it the cruelest tax for good reason. And yet, it’s still widely utilized, and probably China’s exit strategy from its currency peg.
And not throwing out management INCREASES moral hazard.
Well, it can’t be such a pleasant job to have right now… ;D But joking aside, with no prosecution and no clawbacks of salary and bonuses, it’s basically a draw. The bad guys already won.
Why Detroit should be allowed to keep making SUVs. I really like this article. It’s common sense!
http://seekingalpha.com/article/109701-the-case-for-making-bigger-cars?source=headline1
“That is a long-winded way of saying that government inefficiency and incompetence is not a given, as is often depicted in the US.”
It’s a given in the U.S. Look at how the government-run schools, the U.S. Patent Office, the Big Dig, etc. are run. California is on the verge of bankruptcy, and the U.S. government appears determined to follow suit.
Time to get over prostrating before the public sector when it has abjectly screwed up.
Banking and health insurance are two industries that seem ripe for nationalization. They provide no intrinsic value added service on one hand (except what the marketing folks dream up as lipstick on their pigs) and make undeserved profit on requirements of living in society on the other.
A banking system that is run by the government would not be motivated by greed to put the world economy in the position that Wall Street has done. It is only the propoganda by the fascist media that has convinced Americans that totally unfettered private enterprise is the solution to all problems….its called brainwashing and they have been overly effective at it.
It is scary to me that normally rational people make insane leaps of faith and belief in our current economic system with little or no data to back it up. The theocrats have been polishing faith based scams for years and now are in bed with the fascists in America.
Within this next year there will be hell to pay (pun intended) for the results of these sorts of beliefs and the criminal acts done under their cover.
“A banking system that is run by the government would not be motivated by greed to put the world economy in the position that Wall Street has done.”
You are delusional. Not motivated by greed? The politicians in Washington aren’t motivated by greed and wouldn’t use a central bank to further their own end?
The Federal Reserve created the massive credit bubble that facilitated this mess. Supposedly, it answers to Congress, which ignored the problems for the last 20 years.
“They provide no intrinsic value added service on one hand (except what the marketing folks dream up as lipstick on their pigs) and make undeserved profit on requirements of living in society on the other.”
No intrinsic value? So buying insurance on my car, my house, my life has value but on my health it doesn’t?
2:02, you are missing the point. Other countries have decent public services, including the post. And isn’t the Patent Office’s problem largely due to understaffing? That isn’t an unfixable problem that is a fundamental indictment of government, that’s a budget issue.
You have merely said American government is no good. So why do you accept such lousy performance? You almost seem you’d rather keep it than figure out why other countries do better here.
A banking system that is run by the government would not be motivated by greed to put the world economy in the position that Wall Street has done.
I’m really drawn by the idea of banking as public utility, but I think it’s a hopeless dream. I suspect a private market would form around it and pervert it badly until it’s worse than the original. Look at what happened to FNM and FRE and the mortgage market. I prefer competitive, anti-monopolistic environments with strict, capable regulators, which is an even more hopeless dream.
Even if believe banking as a public utility could be realized, that doesn’t give me a strong reason to want to nationalize these particular toxic waste dumps.
Because it’s spelt with an ‘s’?
Because it’s spelt with an ‘s’?
#1: We “spelled” things as well as we grammarize them over here.
#2: That was a low blow, no matter which part of the commonwealth you come from. Go eat a tea biscuit. :D
My point is that the successes of European bureaucracies are not importable into the U.S. I can’t tell you why they aren’t, but I predict improvement will never happen. The reason, possibly, is that the U.S. is simply too big.
The U.S. Patent Office’s problems are not limited to understaffing and they have nothing to do with budgets. The U.S. Patent Office, in fact, runs large surpluses.
The quality of the examinations at the USPTO, at least the ones I observe, are severely lacking compared to those of the European Patent Office. The U.S. Patent Office has been around in some form or another for 200 years. You’d think it would have things figured out by now.
“Is this “Change We Can Believe In?” Looks like the same old crap to me, with better salesmen in charge.”
the equation is simple D good, R bad. how hard is it get?
a lot of liberals instantly turned as dumb and faithfully zealous as the meat head religious republicans they howled about for 8 years. the past 3 months have been the most politically disappointing in my lifetime for the audacious willingness of the rank and file left to ignore the fact that the present corruption knows no party boundaries.
not importable
Speaking of grammatical puzzles, that one could have been taken as not importable, or not im-portable, with completely opposite meanings. :D
I agree. The USPTO sucks. I don’t think Europe has a great grasp on the problem, though. Breakthroughs are collaborative these days, knowledge is very leaky, and enforcement is weak. At least in the software sector, where I think this is well demonstrated, we had the patent equivalent of a cold war, followed by mutually assured destruction, and we’re in disarmament now.
How do you increase the value of knowledge and innovation in today’s world? Dunno. Real hard and important problem.
“Look at what happened to FNM and FRE and the mortgage market.”
That happened because we privatized them and imputed the profit motive. They were doing fine before that helping people buy houses.
“The Federal Reserve created the massive credit bubble that facilitated this mess.”
~~~
The Federal Reserve is privately owned and operated. Their shareholders are the member banks and they get interest on their deposits of 6% by law.
They have fostered the illusion that they are a government agency so that people would believe they were. They are not Federal and they have No reserves. Their boards are shareholders and the FOMC members are chosen from a list of approved candidates, not candidates of the president’s choosing.
We need to Nationalize the Federal Reserve before they bankrupt us all if they haven’t already.
Because nationalization is a threat to American masculinity?
Even so, some areas still get high marks (the FDIC).
It’s funny that you mentioned one of the villains of the current crisis as an example of competent government.
Chris Whalen, a highly regarded bank industry expert who is very plugged in in Washington says the FDIC is far and away the most competent bank regulator and he speaks highly of their staff.
americans are convinced that less government is better government and they keep electing people that promote that idea. how can you believe in the competency of an official who doesn’t believe that the government can do anything right?
maybe if we started electing officials who actually believed in the idea that public funds can be allocated efficiently, we’d have better luck promoting nationalization plans. between our national pride and the belief that every other country’s government sucks, so that we never learn any positive examples, and our own elected official’s dogmatic believe in the inability of government, how can we possibly have a healthy, logical public discussion on the potential benefits of nationalization?
It would seem to me the most important thing with all this money going into that economy is you can take out out again. Nationalize the buggers I say and sell them back to the capitalists when they get over themselves.
Is there political ideology working here, or am I just feeling the momentum of the last eight years? Given the nature of the problems, I hope it’s the latter. Still, there seems to be a phobia afoot. Consider how capital was recently supplied to banks in England versus the United States. Gordon Brown came out swinging, clearly with the intent of taking any use of taxpayer’s resources seriously: He got greater return, greater participation and applied severe discipline than Paulson. Paulson seemed more interested in finer strategic points designed to massage and manipulate public perceptions than how much of the public resource he threw at the problem — the nine-bank shell game to hide the needy among the healthy, for example. So, did Brown and Paulson’s actions differ primarily because their technical analyses of the problems differed or because they needed to be consistent with the range of options allowed by their political traditions? If time is of the essence, as most experts seem to believe, we should hope the great minds we have working on holding our financial system together are influenced more by their technical understanding of the challenges than by concerns about consistency with their (or their bosses) political ideology.
Yves,
you are an artist with words. But I am not buying it. It may be true that we “are all Keynesians now”, but I am not quite willing to take the leap to “we are all Marxist now”. Or worse: “French”.
Government has its moments, but private enterprise has more. I am not eager to see the progressive intelligencia repackage this Minsky winter into the failure of capitalism.
Maybe because the public is nervous about putting the same people who’ve ruined Social Security in charge of what would be, I assume, an enterprise that’s supposed to responsibly maintain a balance sheet and make a profit.
bg,
I am not advocating nationalization per se. I am attempting to point out that our squeamishness about anything that looks like nataionalization has the potential to make us even worse off.
The US is effectively giving unlimited backstops to private enterprises. That is an invitation for looting. I’d rather see more controls, with the possible resultant inefficiencies, than giving a blank check to parties that have demonstrated their incompetence and/or venality by running their companies into the ground.
That’s because the US population already have more government than it can possibly carry.
People are conveniently ignoring the fact that the US already have MORE government as a percentage of GDP than most “socialist” European states, more bureaucracy, more “unionocracy” and much more legislation.
Taxes in the US are very high too.
The income tax appears reasonable but the aggregate of property tax, tax progression, outrageous medical costs, high education costs and falling salaries due to excess immigration soon gives a different experience!
The US is much closer to the USSR than anyone dares to admit.
Yves,
My libertarian values are in shatters, and many of us are trying to find our footing again. It is obvious that the free market is not inherently stable, and it is furthermore obvious that government involvement is the only way forward. You have sold me on the Swedish model for the banks (nationalize them until they are fit for IPOs), and I am actively retraining my cohort. But this is a slippery cliff we are on. It is going to be obscene as our lobbying infrastructure retools itself to gorge on the governments largess. But more to the point there is no natural stopping point. Do airlines have fewer employees worth helping than autos? What about marginal farmers? I’m not very good at what I do either, can I get some help?
Right, fair and moral hazard are passe. But I can still fear the necessary. And I will be among the choire trying to keep the government focused on keeping money moving to the productive parts of society, rather than building an unproductive parallel universe.
“Undercapitalized? Us?…That’s hilarious, Hank…”
Dividend Date Dividend
FNM June 12 2008 0.25
FRE June 25 2008 0.25
WM July 29 2008 0.01
LEH August 7 2008 0.17
AIG September 3 2008 0.22
MER September 10 2008 0.403
JPM October 2 2008 0.38
MS October 15 2008 0.27
C October 30 2008 0.16
GS October 23 2008 0.35
WFC November 8 2008 0.34
WB November 25 2008 0.05
BAC December 3 2008 0.32
@bg 4:47,
Those were the most encouraging words I’ve heard in a long time thank you.
Skippy
The answer is simple: in US you cannot even talk about Karl Marx…Free markets and capitalism cannot be discussed, they are taken for granted. But now that US is realizing some of Marx prophecies,it is not feeling comfortable.
Read the 10 Planks of The Communist Manifesto by Marx to discover the truth and learn how to know your enemy. For instance N°5:Centralization of credit in the hands of the state, by means of a national bank with State capital and an exclusive monopoly. What is happening in US?
Why economists versus philosophers?
Aha! Finally, something my expertise can speak to in some way!
I study partisanship, culture and individual beliefs. There is a still unsettled debate on the nature (and existence) of any patterned division along moral/cultural values between Republicans and Democrats. Here’s the deal though:
We know that party identification is not rational, but that its one of (if not the) most important predictor of electoral choice. Additionally, we know that the parties have staked out increasingly dichotomous policy platforms. What some people are beginning to point out is that the visible moral clashes played out in the political realm post-Reagan have become cathected with the emotions of the 1960s divisions. Further, the somewhat activist investigative journalist Bill Bishop put forth the idea that we are ALL separating ourselves along boundaries in part defined through this historical fracture.
What we’re trying to figure out now is whether the places people choose to go (either to live or to play) have an impact on not just substantive political preferences but on their latent political frame of reference sometimes called ‘political culture’. If the 1960s have propagated generationally and solidified (and there is evidence it has) we find ourselves with voters who have linked very visceral moral judgments to rational public policy strategies.
It doesn’t help that poverty is morally stigmatized (increasingly so post-WWII I’d guess). Even worse, the mutual distrust of government by both sides of the 1960s division means that everyone hates ‘government intervention’ and has for more than a generation now. This means we don’t even get the safety net of a professional, technocratic federal bureaucracy (like the rest of the industrialized world). Well, we don’t unless the President believes we should, and Bush is a perfect example of what happens when you leave the decision up to people who a priori assume government is inefficient.
Sorry for the long rant but this is a question that I’ve been considering for a while now, as well as an implicit part of my research.
Well, when the American Civic Literacy Quiz (ostensibly about American History and Institutions) has the following last 9 questions (on 33)…
25) Free enterprise or capitalism exists insofar as:
A. experts managing the nation’s commerce are appointed by elected officials
B. individual citizens create, exchange, and control goods and resources
C. charity, philanthropy, and volunteering decrease
D. demand and supply are decided through majority vote
E. government implements policies that favor businesses over consumers
26) Business profit is:
A. cost minus revenue
B. assets minus liabilities
C. revenue minus expenses
D. selling price of a stock minus its purchase price
E. earnings minus assets
27) Free markets typically secure more economic prosperity than government’s centralized planning because:
A. the price system utilizes more local knowledge of means and ends
B. markets rely upon coercion, whereas government relies upon voluntary compliance with the law
C. more tax revenue can be generated from free enterprise
D. property rights and contracts are best enforced by the market system
E. government planners are too cautious in spending taxpayers’ money
28) A progressive tax:
A. encourages more investment from those with higher incomes
B. is illustrated by a 6% sales tax
C. requires those with higher incomes to pay a higher ratio of taxes to income
D. requires every income class to pay the same ratio of taxes to income
E. earmarks revenues for poverty reduction
29) A flood-control levee (or National Defense) is considered a public good because:
A. citizens value it as much as bread and medicine
B. a resident can benefit from it without directly paying for it
C. government construction contracts increase employment
D. insurance companies cannot afford to replace all houses after a flood
E. government pays for its construction, not citizens
30) Which of the following fiscal policy combinations would a government most likely follow to stimulate economic activity when the economy is in a severe recession?
A. increasing both taxes and spending
B. increasing taxes and decreasing spending
C. decreasing taxes and increasing spending
D. decreasing both taxes and spending
31) International trade and specialization most often lead to which of the following?
A. an increase in a nation’s productivity
B. a decrease in a nation’s economic growth in the long term
C. an increase in a nation’s import tariffs
D. a decrease in a nation’s standard of living
32) Which of the following is a policy tool of the Federal Reserve?
A. raising or lowering income taxes
B. increasing or decreasing unemployment benefits
C. buying or selling government securities
D. increasing or decreasing government spending
33) If taxes equal government spending, then:
A. government debt is zero
B. printing money no longer causes inflation
C. government is not helping anybody
D. tax per person equals government spending per person
E. tax loopholes and special-interest spending are absent
http://americancivicliteracy.org/
endorse above.
Skippy
I stopped reading when you said European governments deliver services efficiently – because I was laughing too hard.
If Congress had regulated properly and learned from the Savings and Loans Crisis, the mortgage mess might have not taken place. The sooner Congress requires down payments on homes and fixed rate mortgages the better.
Before the government passed the law to bail out financial institutions, it could have made sure financial institutions would not be able to give out bonuses and would not be able to pay employees more than amounts Congress set. Congress could make exceptions.
Congress could do a better job investigating fraud in the finance industry.
Congress could require pay of executives and union members be reduced if the automobile companies want loans from the federal government. Congress could require money to be spent the way it wants.
People should be allowed to buy into Medicare or a health insurance plan similar to what members of Congress have. People should be allowed to buy health insurance plans sold in other States.
If the federal government and State governments spend more money on buses within cities, buses between cities, and passenger rail, people may have an easier time getting to jobs and from jobs which may help reduce the need for food stamps and Medicaid. Fewer families may need to have 2nd cars and 3rd cars. We might use less foreign oil and have cleaner air. Many more businesses might want to advertise inside of buses and passenger rail because people inside of them may see ads longer than ads that are in magazines.
The least that should be done to grow the economy and create jobs is the indexing for inflation of capital gains, interest from savings accounts, and dividends. If the capital gains tax is not indexed for inflation, people may pay the capital gains tax when they have actually lost money because of inflation.
If the federal government is serious about growing the economy and creating jobs, it should stop taxing capital gains, interest from savings accounts, dividends, and estates.
Congress should eliminate the Federal Reserve or veto many of its decision.
Congress should consider having our currency backed by gold, silver, and other commodities.
I ran for United States Senate in 2002. My website is http://www.myspace.com/kennethstremsky
Fidel here. To help you better nationalize your otherwise loser economy, I offer you failed capitalist gringos my infinite wisdom. First, learn the Internationale. Second, replace those 50 cheap-looking stars on your flag with 49 gorgeous yellow hammer and sickles on a red background. Third, hand Florida over to us. Fifth, worship me. Of, and Fourth, I need access to Gitmo to put up my beloved dissidents.
Fidel out.
The question du jour is why does the US have such a phobia regarding nationalization. Per the lead-in, I suspect it has a great deal more to do with social conditioning than a case-by-case assessment of possible gains and losses.
It’s cultural. We (used to?) believe in personal responsiblity and private property. Risk is a part of life. Now that things are icky in the auto industry, some of us don’t believe in that so much any more and run mewling to the government for a handout. Of course, that handout (or the financial support after nationalization fails to cure the problem) will have to come from the remaining practitioners of personal responsibility.
That’s bound to work, right?
I’m confused about some of the terms.
What’s the difference between the US Gov “Nationalizing” parts of the economy and Powerful Business Interests privatizing the government?
If the Gov is truly taking over these companies shouldn’t it be getting some some of the potential upside. If they’re truly in charge why has no one been indicted for financial fraud?
They’ve got no problems bringing petty corruption charges against slippery characters like Blagojevich.
So again, I’m confused. Who is in charge?
brilliant Yves, slowly, but surely it will appear that nationalization is the only way out. if it isn’t why did they do it with AIG, freddie and fannie after all other possibilities were exhausted?
and indeed it is social conditioning residue from McCarthyism and the Cold War.
From Quotable Mises:
“There is no use in deceiving ourselves. American public opinion rejects the market economy, the capitalistic free enterprise system that provided the nation with the highest standard of living ever attained. Full government control of all activities of the individual is virtually the goal of both national parties.”
Wait, what? European government bureaucracies deliver services efficiently? With respect to what standard of efficiency? I am highly skeptical of that assertion.
In any case, this is a political issue, not an economic one. European culture is based on an historical attitude of submission to authority. American culture is based on a history of independence and self-reliance. Americans are not as willing to accept safety and mediocrity, in exchange for freedom and the possibility of excelling … at least, not yet.
It’s also quite unfair to characterize the American system as being free market and capitalistic, and to speak of Bush’s legal changes as “deregulation”. The American financial system is subject to an unbelievably byzantine complex of regulations that control almost every aspect of the business. This is about as far as you can get from a free market system. I work at a US-based hedge fund, a business that is in one of the least-regulated areas of the US financial industry, and I know for a fact that there is nothing that is done in this business without significant legal analysis of the regulatory requirements.
The financial industry is not unique in this regard. Every American industry is buried under a blizzard of regulations. Check the Federal Register — thousands of pages of new regulations are published _every_year_. The fact that there are still some small number of business decisions that are not immediately subject to regulations does not equate to a free market.
Having said that, I do believe that since the government got us into this mess, it is their responsibility to get us out of it — but not through bailouts accompanied by increasing controls over business. Instead, the regulatory burden should be lifted. We need to employ more people? Then get rid of minimum wage laws and closed shop union laws. Businesses need capital? Then eliminate the corporate income tax. We need to increase opportunities for investment? Eliminate the capital gains tax. We need to increase productivity? Then put a moratorium on new regulation, and suspend existing regulations. There are better solutions to the current financial crisis than just throwing money at the problem and taking over businesses.
Yves, the reason nationalization is a dirty word is that in the final analysis, it entails coercion — the use of force by the entity that has a legal monopoly over force. If one goes back to basics, it is the entire fascist/socialist economic approach that needs to be challenged as immoral and inconsistent with the nature of man. The unintended consequences of the USA's failure to pursue an ideal of free market capitalism (more so in recent years than ever before) will be to race the ghost of the Soviet Union to the murky bottom of history.
We have finally lost the opportunity offered us by the Founders to develop a free and spontaneous society and showcase the USA as an example of how it can prosper and thrive. It was never tried. See "the Ultimate Moral Hazard" http://www.atlassociety.org/showcontent.aspx?ct=2085&printer=True
The American public has rejected it. See http://thematrixnot.blogspot.com/2008/11/republicanconservative-loss-what-went.html
real-change-for-change.html
American government is currently the problem because it is being run by the corporations and monied familys.
Wall Street convinced the government to repeal the controls put in place during the depression and we are on the cusp of reaping the rewards of that fascist move.
The fear of nationalization has deep roots in the American political economy – in part because of the way we as a nation have remembered previous examples of direct and intrusive governmental intrusion into specific economic sectors. Think here about Andrew Jackson’s war on the Second Bank of the United States (which is actually a model we might think of at least rhetorically in that AJ’s complaint lay in the size and influence of this demonstrably un-democratic private institution on the national economy), the collapse of public credit after the 1837 Depression which was tied directly to government guaranties of private canal, roadway and railway construction debt, Woodrow Wilson’s federalization of the railroads 1917 – 1920 (widely depicted in contemporary literature as an abject failure – but which, upon careful unpolemical review was a spectacular success in addressing the systemic problems it was intended to solve and whose reputation today derives mostly from often wild-eyed post-return to private control PR by the railroad industry)
In the end, it is the corporations who created this mess, not the state, though the state’s willing complicity in terms of a nearly criminal and deliberate failure to regulate the financial sector cannot be ignored. Absent the state, private individuals and their corporate spawn would quickly devolve into barbarism.
This reminds me of the UK government’s dithering over Northern Rock. We should probably call the Europeans’ comfort with government service provision Continental Europeans’ comfort with government service provision. One of Thatcher’s legacies in the UK is an extreme distrust for government service provision, at least within government. Since Northern Rock, and having realised that it had already presided over a substantial increase in government spending during the boom years, Brown’s government has rediscovered the virtues of government control.
Isn’t the government operating businesses for profit socialism?
We’ve all seen how that’s worked out.
Shockingly FDR might have said it best when he said;
“A program whose basic thesis is, not that the system of free enterprise for profit has failed in this generation, but that it has not yet been tried.”
Yves you are very smart, and I love reading your blog. I have to say though that if you want to use a limited number of anecdotal examples of how government nationalization has worked, then lets do a more comprehensive tally of successes and failures. Off the top of my head here are a few
Amtrak
New Zealand Rail
Pemex
Phone, utilities, and oil in Venezuela
Are there things government does well? Absolutely, like police, fire, military and a number of others.
Allowing the government to control our banking system is a recipe for disaster. Look at all the demogoging going on about BofA and Republic Windows in Chicago. If the process was nationalized guarantee that we would have banks being forced to continue to loan to bankrupt firms. Kind of like the PRC.
Yes, European governments deliver services efficiently. Two words: health care. The US spends twice as much per capita and ranks at the bottom in quality metrics in surveys relative to other advanced economies (the only thing we score well on is preventive care).
Now of course, the US has such incompetent services, like the TSA and INS, that I wonder whether it is deliberate.
If by “nationalization” you mean the forced taking of a now-private enterprise for the good of the public, then the reason that is a dirty word is because of a little-noted document called the US Constitution, the Fifth Amendment of which says: …nor shall private property be taken for public use, without just compensation
tompain,
You are choosing to misconstrue the argument. The companies in question, Citi, AIG, the automakers, came to the government for a rescue. They were not “forcibly taken over” nor is such a move proposed. In fact, Cerberus has said it would give up all its upside in Chrysler in return for a rescue. That is tantamount to giving up the equity, an admission (from your “taking” argument) that the equity has no value, ie, there is nothing to “take”.
The contrast here is Warren Buffet and Goldman, where Buffett got vastly better terms and reporting, and the UK bank rescues, which were more punitive and also had tougher controls. Our bailouts have been pretty close to handouts. I take it you are defending that? You’d rather see Mussolini-style corpocracy?
When little banks fail, no one has any problem with the FDIC taking them over. Funny that it becomes controversial when big, well connected names are involved.
195. That’s how many ountries there are in the world.
Joe
Countries also.
Joe
Yves, precisely right.
In fact, it seems to me that if there is to be a healthy car market in the U.S. in the future, the temporary nationalization of the Big Three, or at least GM and Chrysler, is the best way to insure that there is an American company out there, rather than Japanese companies leeching off enormous tax advantages designed by Southern states. I really think that the problem of global warming, the problem with dependence on foreign oil, and the problem with the US’s continuing, expensive, failure ridden posture in the Middle East can be addressed by decisive government action. If, for instance, as I think may be the case, the first step towards a more efficient automobile using less amounts of oil and emitting less is the use of diesel in engines, as in Europe, then the U.S. government has every interest in building refineries for diesel to bring the price of it down, and extending the availability of it to every town and village; similarly, a system that would allow electric recharge for electric cars could also be a government sponsored project that, eventually, spins off to the private sector. The initial investment on such projects is prohibitive at the moment, but they are the kind of multipliers which should be central to the state’s spending enough on infrastructure to cushion the recession.
Steve in Philly said (in part):
European culture is based on an historical attitude of submission to authority. American culture is based on a history of independence and self-reliance.
I beg to differ. American culture at present is best characterized as an authoritarian one, and is little focused on independent thought or action.
You need only look at the attitude fostered by our public schools, with police on campus, lock-downs, uniforms and enforced conformity.
How about the multitude of (largely unenforceable) laws on the books, regulating every aspect of what should be private behavior — sexual behavior, drug use, and even the color of your mailbox, if you’re unfortunate enough to live in a condo.
Easy sloganeering about “…freedom and the possibility of excelling…” hardly makes up for an unprecedented transfer of wealth to those same people who work so hard to suppress freed everywhere else in our lives.
A banking system that is run by the government would not be motivated by greed to put the world economy in the position that Wall Street has done.
You can’t be serious.
Superpower nations have been motivated by greed even moreso than Wall Street. How many needless wars has the US engaged in over the last half-century? Great Britain? France? Russia? Germany?
What’s to keep you from moving to Europe if things there are so great ?
Why? The answer is simple – but one definitely ignored these days:
It’s not in The Constitution of the United States.
None of the actions taken by Congress or the President of late are… which is why our Republic is failing.
Most importantly, the existence of the private banking cartel deceptively called “The Fed” is strictly against the Constitution.
http://video.google.com/videoplay?docid=6507136891691870450
Steve Higgins
Boulder Loan Ranger
http://www.BoulderLoanRanger.com
http://www.AmericanNationalFinancial.com
Why is ‘nationalization’ a dirty word?
Same reason ‘socialized medicine’ is. Because powerful interests of a certain ideological persuasion, armed with a very loud megaphone, have made it so through mass indoctrination.
Amazing that it took so many posts for Steven Higgins to finally point out the obvious … that nationalization is a dirty word because it runs directly counter to the founding document and philosophical foundations of our country.
Although, when ‘regulating interstate commerce’ means total power over everything bought or sold, or anything that COULD be bought or sold, I do suppose the Constitution’s limits on government economic power are effectively nonexistent.
“I beg to differ. American culture at present is best characterized as an authoritarian one, and is little focused on independent thought or action.”
And which perspective better characterizes this shift in culture? Opposition to bailouts and support for “letting the chips fall where they may”? Or nationalization of whole industries under a single, central authority, because, gosh darnit, we just *can’t* let anyone fail anymore!?
As always, the debate is over….
But:
“Banking and health insurance are two industries that seem ripe for nationalization. They provide no intrinsic value added service on one hand (except what the marketing folks dream up as lipstick on their pigs) and make undeserved profit on requirements of living in society on the other.”
Corporations can say no. Private health insurance has a large rationing component. Everyone hates them. They are paid to be hated. Before the early 90’s changes, it was strictly demand side rationing and not particularly effective. With various versions of managed care, the insurers started a beat down on suppliers also. One of the main reasons that health insurance is essential now is that your card gets you 50% + discounts off fictional “list prices.
As far as banks — it doesn’t take a genius to realize that the fact that banks are “hoarding money” is another way of saying that they aren’t lending promiscuously. They are again lending to people with a good chance of paying it back. Once again, the nominally private banking system is saying no in a way that no politician would like to.
Finally — autos. You can see that congress can’t decide if they want plans that would work but immediately fire 1/2 the workers or a fictional plan that would amount to a simple stimulus/jobs program. They will do a little of both and quickly punt.
Government is outsourcing being mean. Saying no. Etc.
Overt nationalization means that politicians must make the hard choices and be hated. Plus, they would also have to take some responsibility for outcomes.
As Rick Santelli, the only sane voice on CNBC, put it today: “The market is working fine, you just don’t like what it’s saying.”
There are certainly differences in America’s development that give it a less permissive attitude towards governmental direction, probably the most prominent being a lack of homogeneity in the population.
But I don’t think that those differences directly explain today’s reluctance towards nationalization, and simlar, patently obvious solutions to our economic ills. While embedded to some degree in our culture, most of these impact contemporary opinion only on the edges…
The simple answer is that the social disintegration of the late 60s and 70s produced a very strong libertarian impulse-both economic and social-throughout almost the entire society. This re-oriented much of the interpretation of our own history, which was essentially re-written to fit the New Perspective.
While we are (thankfully) finally trending away from that period, change is slow in those institutions that tread in the arena of ideas, in considerable part because those institutions are quite controlled (either by size, money, or tenure of staff) and thus produce “high barriers to entry” to any idea that does not fit an increasingly narrow ideological rubric. The result is 30 years of public policy that is as invigorating as the stagnant backwater of libertarian ideas that produced it.
I have great hope and optimism that we are moving forward from this self-imposed censorship, and certainly you can see some stark changes taking place among the country’s intelligentsia (anyone who has read Rodrik or Krugman over the years can see the trend). And the blogoshphere itself is a positive sign.
However, in more reflective moments, I realize either we will change, or we will simply continue to fall behind the rest of the world, only further and faster, with decreasing chance of recovery.
Yes, Banking (as well as financial paper sector) should be regulated like a Utility.
This debacle has affected too many people’s lives nationally and internationally.
Here we are 79 years later.
smart independent
Fidel here, this time to offer you failed imperialist gringo puercos my infinite wisdom once again. But first, let us all bow our heads, showing respect to comrade Lenin, for his glorious vision of a Norte Americano proletarian paradise. El Paradiso, as we say around here, just before we break for a siesta. This time I don’t come empty-handed. Firstly, I now officially decree that you, Los Failed Gringos e Gringas, may freely emulate my award-winning Cubano medical system. Feel free to contact comrade Senior Michael Moore for further details. Secondly, I shall put in a good word for you with comrades Putin and Chavez to sell you their precious oil at a 5% discount (see gas station for details, limit one gallon per SUV, not available in TX, FL, NY, Saudi Arabia, Dubai, and Kuwait, void where prohibited, must be 18 or over to participate). You don’t have to thank me – thank Lenin.
Fidel out.
Re: why are Americans shy of nationalization, it’s the costs. In principal, a nationalized operation could earn a profit, and actually pay into the public fisc. In practice, nationalized entities are all but certain to require public funding; certainly _permanently_ nationalized entities do this in most instances. US citizens have no illusions on that score: You seize it, you fund it. Now, Americans have a complex social antipathy to government paying for permanent enterprises which goes back to social conditions in place in Europe _before 1492_; there is a long backstory to our social resistance to permanent government funding.
If you could show to a US citizen that a nationalized outfit would _cost them less_ than the alternative, they would and will be for it like a shot. This is why nationalized health care will be an easy sell, for example. Other candidates, not so much.
I would love to see _part_ of the US banking industry run as a public utility. By no means all of it should be taken public, so to speak, but a low-cost, basic service, publicly backed sector to the financial industry would have a lot of merits, credit unions allowed to eat red meat rather than milksops, for example. We won’t get anything like that out of Obama, and by the time we have someone else the window of opportunity for such a concept will all but surely be closed. I’m not holding my breath.
Anon of 12:05: ” . . . [T]he social disintegration of the late 60s and 70s . . . .” Friend, I don’t know WHAT you were smoking or still are, but that phrase is the sheerest nonsense. Nothing ‘disintegrated.’ Relatively little in the society actually changed, and that not fast and with long antecedents. Nonsense . . .
Now, there was a cyclical social moment in play, and it ended, and others followed. The explanation for the sentence just written is long, and tangential to your point, so I won’t expand upon it even if the content is relevant. But even in _that_ regard, there was no ‘disintegration.’
The answer is simple: in US you cannot even talk about Karl Marx…Free markets and capitalism cannot be discussed, they are taken for granted. But now that US is realizing some of Marx prophecies,it is not feeling comfortable.
This is true. Even mentioning the word “capitalism” out loud puts some people on the defensive. The very act of calling things by their proper names is interpreted as an implicit critique.
Nationalize,Subsidize,Privatize. who cares what you do as long as you find a way to shore up the equity that the banks are burning at an astounding rate.
They are eating up the equity (capital) because for every loan that defaults the banks have to deduct the balance on the loan from their capital base. In no time at all the banks are using up every dollar of injected funds to cover the losses.
Now, whatever system you use to re-capitalize the shrunken equity base is good. The best way, of course, is to float new stock issues that will go directly to the equity portion of the balance sheet. Unfortunately, the SEC and the Fed have foreclosed this route by allowing unfettered shorting of bank stocks thru the elimination of the uptick rules and permitting naked short positions against bank stocks that decimated the stock valuation of the banking industry and thoroughly spooked the stock investors from funding any bank re-capitalization effort.
The result is check-mate! Nationalization by some other name to protect the charade of a free capital system.