To speak of these priorities in these terms is to see how facially incompatible they are. That's simply because ideologues of the right or the left will consider one of the two priorities to be the only one which matters, and the other one will take care of itself.
The mistake that people on the right make is that markets, left fully free, will automatically take care of everyone's material needs, and that government's most valuable contribution will be to get out of the way. On the left, people assume that social justice is a simple matter of redistributing wealth from those who earned it to those who deserve it, and there's more than enough wealth to go around.
So it's perhaps novel to speak of achieving both of these priorities together, given that so many people are so firmly committed to one at the expense of the other. But we stand at a moment in history when it's critical to hold both opposing ideas firmly in mind, to see how they interact, and to see how we can indeed achieve both.
It's a critical moment because there's little doubt that the global economy will soon realign in ways not necessarily conducive to growth, either in employment, in aggregate output, in trade, and in real returns on investment. We face the prospect of lean years ahead. The provision of social justice, for millions of Americans, seems likely to shift from an abstract good, to a matter of direct personal concern. And in Dickensian fashion, the very forces which will put pressure on many ordinary people are also the ones that will make limitless economic opportunity seem like a distant memory. The core ideological objectives of both the right and the left are under simultaneous assault as has happened seldom before.
For the next several years, we're going to be talking about how to divide the economic pie up more evenly. Only government can do this, since government at root is the sum of the public actions of all the people. Government isn't evil. Government is us.
This is a conversation that's entirely congenial to the elites who make up the political and journalistic classes. Those of us who labor in business and finance, however, see the other side of the coin, which is that the pie needs to grow.
This is a matter of basic logic. There's a balance point at which redistribution becomes too large, as a proportion of income, to make it worth taking the risk of producing very much of anything. Redistribution reduces returns on investment, in effect acting like an increase in interest rates. The pressure from increased demand for goods and services does NOT encourage new production, contrary to Keynesian dogma. The only ways out of the box are to redistribute less, or to produce more. Producing more is the only practical choice today.
This much was evident two years ago, before the current crisis ignited, as the public obligations to a large and growing cohort of retirees was the proximate problem. Today, this problem is bigger than ever, as the private savings of those soon-to-be-retirees have been decimated in a grand capital-markets bonfire. And we have less to work with than ever, as the same bonfire has consumed literally trillions of dollars of the world's financial capital.
The financial and economic problems will need a socialized solution, too. They're simply too big for the private sector to solve on its own, in a reasonable amount of time. Too much capital has been lost, either outright, or by passing into the control of surplus countries that would rather save than consume and invest.
Soon enough, you won't be able to escape the talk of "grand bargains." This discussion will be framed as a dichotomy by the people who lead the discourse today, and who (whether or not they, and we, admit it) are polarized ideologically. For that reason, it's going to seem like an impossible conflict which one side will need to win at the expense of the other.
To wit: "We will need to cut some Social Security and healthcare benefits, in specific ways that avoid disadvantaging the less affluent. At the same time, we'll need to raise taxes significantly on the wealthy and the productive, who will be called upon to do their fair share."
And another: "We will not be able to meet our obligations to our children and grandchildren to provide them with a future that's free of overwhelming debt, unless we take some very significant pain right now. Let's decide together which among us will need to take that pain. Let's start with those most responsible for the crisis."
If the debate which we are fated to have unfolds along these ideological lines, it will tear the country apart. We'll be sowing the seeds of an efflorescence of political radicalism similar to that of the mid and late Depression years.
What's the key to an understanding of the whole picture that looks past the standard ideological boundaries? We need to understand our political economy not as a mechanism for distributing wealth, but rather for allocating the economy's current production of goods and services.
Every individual, and certainly every highly-motivated individual determined to obtain above-average financial success, seeks the accumulation of savings and investments that will give him a large amount of future consumption. But like it or not, what society ultimately needs is to generate enough current-period production to adequately meet the needs of everyone. Anyone who imagines that the productive and the wealthy can continue to take a large share of a shrinking pie needs to reread the events of 1789. This position has law, legitimacy and morality on its side, but those are precisely the virtues that are threatened as social cohesion frays.
It might have seemed two years ago that all we needed to solve the problem was to get out of the way and let the wealth-creators do their thing. And if the world of two years ago were today's world, I'd be arguing that case. What changed? We found that we our high levels of consumption and investment were enabled by extremely high levels of financial leverage, a systemic underpricing of investment risk by every investor in the world, and the willingness of emerging countries to trade their production to us in return for the illusory security of central bank reserves.
None of those factors exist in today's world, and it won't do to suppose that "getting government out of the way" will bring any of them back. For better or worse, we need to do two things simultaneously: balance the distribution of goods and services so as to avoid massive human suffering; and find a way to increase the amount of goods and services available for distribution.
There's no shortage of well-debated ideas for achieving the first of these two legs of the grand bargain. What's not so clear is how to achieve the second.
It simply will not do for anyone to speak in terms of raising taxes on wealth and productivity. By destroying private incentives to produce and invest, this is the way to ensure misery ahead, and quite possibly revolution. This is a mistake that the current Administration and Congress are in grave danger of making.
We must find ways to encourage private-sector actors to step up their wealth-producing activities. In this time of low real returns on capital, that necessarily implies improvements in productivity. It also requires strong, positive efforts by government to reassure private businesspeople, and also our trading partners, that government won't distort their incentives in the future. You simply can't do reasonable business planning in the presence of a government that's committed to "bold, persistent experimentation."
It's inescapable that the government will need to stabilize the financial system. What this crisis demands can't be done by the private sector. The great challenge will be to do that while simultaneously preserving incentives and opportunities for business to work and thrive when the dust settles.
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