he events of the past year have been breathtaking. We now have Republican John McCain swinging wildly from long held tenants of deregulation to a new found populist montra of regulation (at least in finance). Meanwhile the capital markets and businesses large and small across the country and around the world wait anxiously to see how all of the volatility in both the financial and political marketplaces will affect them. What is really going on here?
The now infamous Republican icon Ronald Reagan ushered in an era of deregulation and tax cuts with unrestrained government spending particularly on favored conservative welfare recipients in the defense industry and commercial agriculture. The idea often muted was to load up the government with so much debt and such limited revenues that there would simply be no money left over to spend on society in general. Individuals with means would somehow take care of themselves and we could ignore everyone else in good conscience as deadbeats. This idea has now been utterly discredited by 8 years of the failed policies of the Bush administration. But I think it would be easy to take away the wrong lessons from the experience.
The real issue is that Republicans either don't understand or don't care to engage the complexities in the balance of incentives and disincentives in the proper functioning of capitalism. Businesses may say that they don't like taxes or government regulations but what they really find hard to cope with is uncertainty. It is arguable that cutting taxes aids the individual shareholder. But if that leaves government unable to fund public education or health care in the end the same businesses and shareholders will have a hard time finding and retaining competent workers in order to grow and prosper. Similarly deregulation is appealing up until it stimulates underpriced environmental degradation and unrestrained risk taking that not only threatens long-term earnings but even the on going viability of businesses and whole sectors as presently seen on Wall Street.
While the profit motive is an important incentive to business, the fact is that taxes and regulations are also necessary components of the societal framework for capitalism to grow and flourish. American capital, hard work and ingenuity have proven time and time again to respond to this framework for the benefit of investors, competitors, workers and the environment alike.
The Republican Party lost its way when it decided for short-term political advantage under the chimera of small government to take a sledge hammer to this proven framework by attempting to remove the disincentives of taxes and regulations. We were told that by focusing purely on the needs of individual investors that somehow the markets and society would take care of themselves. Again American capital, hard work and ingenuity responded to this policy redirection but with a plethora of unintended consequences. The immediate result was moral hazard and an orgy of risk taking unrestrained by even the slightest fear of regulatory accountability. In some sense the $700B bailout has even validated this belief by ultimately rescuing many of the American and global investors who were invited to the party. And now as the Federal Reserve wrecklessly ramps up the printing presses; society, investors, workers, taxpayers and the environment alike will all suffer grievously as a direct result.
Capitalism isn't threatened by sensible regulatory, tax and social spending policies that reflect the common stake that we all have in markets and society as a whole. On the contrary, it is precisely the absence of these considerations in a misguided indulgence of individual self interest that has proven disastrous for all concerned.
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