Monday, August 19, 2013
A striking, surprising, and sadly tragic parallel exists between the Irish potato famine that began in 1845 and contemporary U.S. politics.
Nineteenth century Ireland was poor. Rural Ireland's economy and population depended upon a single crop: potatoes. Consequently, the first reports of a disastrous 1845 Irish potato harvest immediately attracted the British government's attention. Following a brief fact-finding effort, the government established a Relief Commission and ignited a furious storm of controversy.
The Economist railed, "[C]harity is the national error of Englishmen." Enrapt with Adam Smith's seminal treatise on capitalism, The Wealth of Nations, aid opponents argued that sending aid would violate two central tenets of sound economic theory. First, giving aid would impose a moral hazard upon the Irish. Aid might alleviate immediate suffering but at the cost of creating permanent dependency since aid would enable the Irish to live beyond their means. Second, aid constituted inappropriate market intervention by the government. Smith contended that individuals pursuing their self-interest in free markets achieved the greatest social good. Consequently, when the government failed to authorize sufficient aid, tens of thousands of Irish died and even more emigrated. (For more on Britain's failure to intervene in the Irish potato famine, cf. Felix Martin, Money: The Unauthorized Biography, pp. 147-151)
Contemporary American politicians, as well as some of their peers on other continents, appear enamored with the idea free market capitalism. There is no potato famine. However, the poor are growing poorer, the rich are growing richer, and legislative bodies continue to act as if the gap between poor and rich were narrowing rather than expanding.
The unfairness is systemic, reflecting the ability of the rich and powerful to structure markets in their favor. For example, the U.S. tax code is 19,000 pages long. Poor and middle class people generally lack the financial and legal resources to plumb the code for every potential edge. The 19,000 pages are substantial (pun intended!) evidence of the ability of the rich and powerful to influence government intervention on their behalf.
In the aftermath of the 2008 housing bubble and associated, although narrowly averted, financial meltdown, critics have called for greater regulation of financial markets. Their opponents have protested against government intervention in the markets for reasons that echoed those given by opponents of the British aid to Irish famine victims. Borrowers accepted loans they had no reasonable expectation of being able to repay. That lenders pushed these loans on borrowers, not performing due diligence, indeed actively trying to persuade borrowers to accept loans because housing always appreciated in value, was irrelevant. Government intervention to rescue underwater borrowers would create a moral hazard, teaching borrowers that excessive, irresponsible borrowing is in their best self-interest. Government intervention to rescue companies in financial trouble because they had unwisely invested in packaged mortgages, even though the packagers of those mortgages made performing due diligence nearly impossible, would distort the markets.
Nevertheless, the federal government intervened to keep several large manufacturers (notably, GM and Chrysler), the world's largest reinsurer (AIG), Fannie Mae, Freddie Mac, and several brokerage firms from going bankrupt and plunging the U.S. economy into a crisis comparable to, or perhaps larger than, the Great Depression of the 1930s. Subsequently, government intervention through continued deficit spending and quantitative easing of the financial markets has helped to nurture a frustratingly slow economic recovery. Most of the government loans and interventions have proven profitable and the bailed out companies are repaying the loans on or ahead of schedule.
U.S. government actions have contrasted starkly with the austerity programs in Great Britain and some other European Union countries. In those nations, adherence to market principles has prolonged and, at times, intensified economic hardships. In view of these events, I understand why people often call economics a dismal science.
Just governments strive to protect the most vulnerable. Christian ethics, constructed on the ministry of the Jewish prophets, emphasize that function. Secular philosopher John Rawls in his exposition of justice as fairness makes the same point, though for different reasons. Social bonds break down when the rich and powerful exploit the poor and vulnerable. When that occurs, everyone loses as crime, other anti-social behaviors, and general economic well-being diminish. In my next post, I will illustrate those dynamics with specific examples from the state of North Carolina.