On Saturday, I mentioned that US private capitalism, as we have known it since the 1980s, is at an end. Here are a few more casualties of these events [i.e., as explained in my previous piece, of the US government's decision to take on responsibility for some $10,000bn of liabilities, and to front up monies of some $1,000bn - I emphasize that I am talking here about the implications of the bailouts, not about the implications, per se, of markets falling or of financial institutions going bust - I am a friend of the Market, not an opponent of it!]:
- Much of the academic theory of financial markets and of corporate finance. There will now follow an intense academic race to develop an alternative finance theory in which we can estimate efficient pricing in an environment in which the government steps in to nationalise the system at the point of system-wide failure. There will also be a whole new interest in the theory of financial crises, in which many of the previous axioms will be abandoned.
- Much of the standard theory of macroeconomic management. Inflation targeting is clearly finished, but if governments might have to find 10% and more of GDP at the drop of a hat to keep the financial system functioning, that will probably imply requirements to hold less debt on average in less turbulent times. The consensus position of the 1990s, reflected in the Brown era management, has proved very badly flawed.
- Most of the arguments against wealth taxes. If the government is going to step in to protect accumulated financial wealth in the way that it has, then (a) those with accumulated financial wealth will have to pay higher taxes in the future to service the debts the government has incurred protecting them (should it be those of us without accumulated wealth that pay for these subsidies?); and (b) there will be a strong argument that since the government insures financial wealth through promising such bailouts, then those with that wealth should have to pay insurance premia in the meantime (i.e. pay higher taxes now to fund the bailouts later). I cannot see how these arguments can be resisted.
- The free market argument against bailing out other failing companies. Kenneth Rogoff, yesterday, repeated in his own terms the point I noted over the weekend. When US car companies and farms and other such businesses start to fail in what will now be a significant US recession, what argument is the government going to be able to offer against providing subsidies to see them through? At the very least, since in many cases the US government will now be a key provider of capital for the private sector through its ownership or backing of much of the financial system, one would expect considerable forbearance on loans.
- Arguments against generous welfare support for the poor. If the state can provide gargantuan sums to support the rich, how can it refuse to provide tiny sums to support the poor?
- A wider belief in the use of market mechanisms to solve problems. Once market efficiency theorems are gone, why would we assume markets are good allocation mechanisms in general? To put it differently, if markets don't even deliver efficiency in areas such as financial markets in which many of the assumptions of market theories hold good, why should people be interested in their use in areas such as health, education or the environment in which the setting has always been acknowledged more problematic for markets?
- The sense of global leadership of the US social model. The US model of capitalism will be seen internationally (with some justice) to have failed. The sense of the failure of capitalism at the end of the 1920s was important to the rise of alternatives in the 1930s and thereafter. In recent years, many British commentators have urged that Brown was moving us towards a European social model when we should have been aspiring to a US capitalist model. What are these commentators going to say now?
Some readers will doubtless think the above unnecessarily apocalyptic. I say to them: then you don't really get what has happened. This is certainly in the top two most profound events, in economic and political terms, that has occurred in our lifetime - the fall of the Berlin Wall being the only potential competitor. As matters stand today, in the long-term, this might yet be seen as bigger than the fall of the Berlin wall. If my language verges on hyperbole, then that is why.