Governments and the Economy

It must be somewhat unnerving, for the campaign staffs of both President Obama and his would-be opponents, to realize that the fate of November’s election may be determined largely by events over which they have no control. Corporations are recording record profits, but they are hesitant to invest in new plant and equipment and, most especially, in new employees, so the success of the business community is not “trickling down” to the millions of Americans who are out of work or under-employed. No one knows if the government of Greece will be able to negotiate new debt terms with its lenders. Will the economy of Italy respond to the “austerity” plans of the current government, even though austerity has never once worked before to stave off a foreign-debt crisis? What impact will the faltering economies of Greece, Italy and Spain have on the Eurozone and what will be their impact on the US economy?

The “economic gods” may smile on Obama, or they may not, but there is next to nothing he can do about it. There is a great myth with which we will all have to live for the next nine months. If economic news is good, Obama will take credit. If the news is bad, the Republicans will blame Obama. Beneath the credit-claiming and blame-throwing, the nation is prepared, however, to engage in an important debate about the relationship of the government to the economy. Is the government a help or a hindrance in economic matters? Does regulation help protect the average citizen from the depredations of Wall Street as Democrats contend or are government regulations “job killers” as is argued by the Republicans? Should the government step in to stimulate growth in economic sectors which, for whatever reason, may not have caught the attention of venture capitalists?

There are some historical lessons that are useful, not so much because they prove either argument, but because they demonstrate how ill-served the American people are when the debate is rendered in absolute terms, as an all-or-nothing proposition and with little regard for the variety of influences that determine whether an economy will grow or not, and how few of those influences have anything to do with governmental policies.

June 4, 1989 was one of the most critical days in modern history. On that day, Poland held the first free elections in its history since World War II. Solidarity, the labor movement that became a political movement, won all the seats it contested in the lower house and won 99 of 100 seats in the Polish Senate. It was the beginning of the end of communism in Eastern Europe. That autumn, the Velvet Revolution reclaimed Czechoslovakia for its people. By year’s end, the Berlin Wall had come crashing down. In two years’ time, the Soviet Union would collapse.

The countries of Eastern Europe developed different models for their transition from communism. It is difficult for us to imagine the difficulties they faced: In Russia, seventy years of a totally government-run economy had created not only incredible inefficiencies but had decimated the very mental attitudes needed to make economic decisions. No one in Russia had any idea how to determine the price of anything. By way of example, in early 1992, I went to Russia to celebrate my birthday. One night, I took a friend who worked at the St. Petersburg Art Institute to dinner at a rather posh restaurant on Nevsky Prospekt. It was a “ruble restaurant,” that is, you paid in rubles not foreign currency. We started, as one must in Russia, with vodka shots and zakuski. Then we had shrimp but instead of the five or six shrimp you get as an appetizer in the States, we got a huge bowl of two dozen shrimp. The main course was a braised beef. I do not remember dessert but we had it. We had a couple bottles of wine and cognac after the meal. It was gluttonous. The check came and it was the equivalent of about $14. I was shocked. So was my dinner guest. $14 represented almost four months’ salary for her. I realized at that moment that I was not a tourist. I was Santa Claus. I gave every waiter and taxi cab driver a twenty dollar tip, which led one waiter, an older gentleman at a Georgian restaurant said to have been one of Stalin’s favorites, to get on his knees and thank me because now he could buy his son, an athlete, a new pair of sneakers he needed. It was profoundly humbling. I brought those who took me sightseeing to the hard currency store so they could buy things not available in the ruble stores. For about five dollars I purchased the book which remains the most precious item in my library, a 1774 biography of Pope Clement XIV in French. (Funny, my Jesuit friends do not seem to like the text!) The book was beautiful but the price indicated an economy in chaos.

What emerged from that chaos was not what could be called, at least not with a straight face, a free market. Former government apparatchiks took over large stakes in companies as they privatized. Anyone with cash made a killing in real estate. The Russian mob flexed its muscles and grew fabulously rich. The pensioners, on the other hand, whose pensions were not worth anything anymore, struggled mightily. Today, Russia’s economy is run by oligarchs and plutocrats and mobsters, albeit, only those willing to stand aside as Putin consolidates his power. There are other threats to an economy besides too much government. The inability, or unwillingness, to protect the interests of average workers showed the ill effects of an impotent government, unable to rein in the unchecked power of those who saw the economy as a thing to be raped.

In the early morning hours of that same June 4, 1989, the Chinese military began violently clearing Tiananmen Square of protesters. The Chinese Communist Party was not about to relinquish control of its country and while they have instituted a series of economic reforms, both before the massacre in Tiananmen and since, the government retains an enormous amount of control over all economic activity. Private industries are permitted, but must function under government auspices and conform to government goals. Even in rural areas, the government directs the activities of farmers. China, of course, has begun tapping into its enormous internal market as well as (pardon the expression) capitalizing on its export-driven manufacturing sector, and China has become one of the fastest growing economies in the world.

We are blessed to live in a country that knows neither the rapacious Russian model nor the Communist-dominated Chinese model. But, the performance of the two economies points to a truth about economic success that is too often overlooked: There are a bunch of factors that explain why some economies flourish and others decline, and government involvement is only one of those factors and not usually the most important.

Apologists for the Chinese will tell you that in their culture, the individualism that we celebrate in the U.S. holds no such privileged place in their system of values. This is hogwash. People everywhere wish to be free. But, it is the case that a society can and should celebrate other values besides economic growth. Gross social inequalities between the rich and the masses can lead to social instability and, whether they produce instability or not, they are an affront to human dignity. As Pope Benedict has said, and said repeatedly, profit can not be the only measure of an economy but here in the U.S., we are beset by economic libertarians who take the idea of freedom and turn it into an extreme ideology, a heresy, a truth run amok.

But, my point today is a simpler one. Politicians, and the public, tend to exaggerate the degree to which government policies influence the economy. Government policy is, at most, the frame within which economic activity will or will not flourish. In Russia, immediately after the collapse of the Soviet Union, the government was incapable of providing the legal structure necessary to support a free economy. In China, the government uses its economic police to keep social change from becoming political change. In the U.S., the great period of economic growth in the 1990s was facilitated by the policies adopted by the Clinton administration (and by the administration of George H.W. Bush), but most of the growth in the economy had to do with internet.

None of the politicians on either side of the aisle will tell you this during the debates this election year, but the future of the economy has very little to do with who wins in November.

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