Letting the Chips Fall

During the year I spent in Chile as a student, my landlady was very protective of me. One of my weekly pleasures was going to the city center on a Friday evening and buying a bag of French fries from a little stall. (In Ireland it would be called a chipper.) They were greasy and delicious. My landlady was never happy about me eating those fries. She was continually warning me that I was going to get food poisoning from those chips. After a full nine months of patronizing the chipper, I did finally get sick. I got a bad case of what was apparently dysentery.

As I lay suffering in bed, delirious with a fever, my landlady minded me like Florence Nightingale. But she couldn’t resist leaning over me and lecturing, “Aha! I told you those papas fritas would make you sick!”

Of all the things I ate and drank in the days leading up to my illness and of all the other things I was exposed to in the air and in the water, how could she be certain that it was the chips that made me sick? Especially when they had caused me no trouble at all the previous nine months? Because she had been predicting it for so long that her mind made reality fit the prediction.

Some people on the political left sound my dear Chilean landlady when they talk about capitalism. They point to the financial crisis of 2007-2008. Aha! they say, see, this shows that capitalism doesn’t work—or at least capitalism as practiced by the Republican party.

That’s an interesting conclusion to draw. The financial crisis clearly grew out of the housing bubble. And the housing bubble clearly grew from a bi-partisan government policy over many years of pushing money into the mortgage market through the government-created entities Freddie Mac and Fannie Mae. Yes, that is an over-simplification, but the fact is that no serious analysis can credibly paint the financial crisis purely as something caused by capitalists gone wild.

President Obama’s take on the causes is particularly interesting, and I confess that I don’t completely understand it. He holds the crisis up as proof that Republican policies don’t work and that we need to go back to the policies of the Clinton administration. The irony is that a lot of conservatives actually agree. As Democrats repeatedly remind us, Clinton left the country with a balanced budget and a thriving economy. Part of this was through luck. There was a reduction in military spending due to the wind-up of the Cold War as well as an influx of tax revenues generated by the tech bubble. But it also had a lot to do with reform of a major entitlement (welfare) and tightening of government spending. Fiscal conservatives liked that, although they credited the Republican Congress more than President Clinton. And they didn’t care for the way Clinton’s successor signed a new entitlement (for prescription drugs) that wasn’t paid for. (It is amusing to hear Democrats criticize Bush on the same grounds, even though most of them, including Obama, fought to spend even more money on the unfunded program.)

Even while invoking Clinton, the current president goes in a direction that is completely opposite to Clinton’s. Obama has spent four years ballooning government spending and has given only lip service to entitlement or tax reform. He has put nothing concrete on the table and criticizes Representative Paul Ryan, who has. This may make the president look more compassionate because he doesn’t want to reform Medicare, but it is a false compassion since everyone knows that the status quo is untenable and beneficiaries will suffer more if the system goes broke than if it is reformed. If the president has a better plan than Ryan’s to save Medicare, he should say so. I would love for him to put forward a better plan, but where is it?

The only solution he offers is to raise taxes on the highest earners. This is what he means when he says that “our plan worked.” He is talking about the policies of the Clinton years. Tax levels were indeed higher under Clinton. But he confuses cause and effect. There was less resistance to raising taxes in a booming economy. In a weak economy, higher taxes tend to drive up unemployment because less money is available for investment and capital. In fact, the president himself said so when he agreed to extending the so-called Bush tax cuts.

The government is spending quite a bit more than it is taking in, and this is not sustainable. The president’s solution is simple: raise taxes. He seems to see it as a simple matter of transferring money from one place (the pockets of the wealthy) to another (federal coffers). But it’s not that simple. For one thing, it won’t bring in nearly enough money. More importantly, changes in tax policy result in changes in human behavior and, under the current conditions, that’s a change that will result in slower or negative growth and higher unemployment. Historically, the most reliable way to get more tax revenues is to create conditions that enable people to make more money. The more money they make, the more people who will be employed, directly or through investment, and the more taxes they and everyone else will pay. But if everyone is to make more money, that will include the wealthy. And the idea of the wealthy making more money seems anathema to the president.

Bill Clinton has always understood this. But he is a good soldier and will say whatever he needs to help get the current president reelected. What is not clear to me is whether Barack Obama understands this or whether, like my Chilean landlady, he sees only what fits his preconceived notion.