Wednesday, January 11, 2012

The Failure of the Century’s Central Planning Experiments

If there is one obvious condition associated with the last century, it is the lack of government humility. Among the century’s leadership there was the self-confident belief that “good ideas” would trump tradition, customs, history, even instinct. There were scarcely limits to political ingenuity. Here was the triumph of positivism, the assumption that rationality can subdue emotion. The engineers were in history’s driver’s seat and the lights appeared to be synchronized in green. Somewhere along the way things went wrong and the lights turned crimson.

For public policy sophisticates, the imperfections in the free market suggested a reliance on planned capitalism. Former President Clinton embodied this view when he said “we can pick the winners in the economy and encourage them with appropriate incentives.” Erstwhile President George W. Bush referred to his domestic policy as “compassionate conservatism,” a belief predicated on government acting as a charity.

And President Obama outdid his predecessors by actually inserting government as a partial owner of private enterprises, e.g. AIG, General Motors.

Each of these presidents was persuaded that government intervention was necessary to address market failures. But the most significant failure of all was not recognizing the debilitating influence of active government. For example, the notion that home ownership should be extended as a way to ensure social stability led to decisions by Fannie Mae and Freddie Mac that perverted the real estate market across the globe. Instead of relying on standard collateral estimates as a home buying prerequisite, banking rules were suspended. After all, the government could guarantee losses and the valuation of housing inexorably rises… until it doesn’t and the government cannot absorb the enormous debt. Now the failure is clear, but instead of taking responsibility for a misguided policy, the pols point accusatory fingers at Wall Street brokers who were given “make rich” arrangements through government securitization. In a curious revision of history, the market became the culprit and government officials the saviors.

At the end of World War II European planners argued that continental stability can be achieved through integration. The model was the United States of America, a nation cobbled together through a unifying Constitution and transactions designed to bring order to the new nation. Western Europe had to overcome centuries of independent national evolution, language barriers and idiosyncratic policy perspectives. These impediments did not deter the continental dreamers. Their catalyst for the union was a common currency, the euro.

While recommendations about fiscal policy abounded and rules (the Maastricht Accord) were advertised, observance occurred in the breach. Cradle to grave security was guaranteed and governments were elected on the premise that unproductive labor can be bailed out and supported through debt instruments and inflation. However in 2011 the dream became a nightmare as Greece became the first of several European nations to display the ugly side of insolvency. Not only do the banks require refinancing, but sovereign debt threatens to destabilize several major nations, i.e. Italy, Portugal, Spain.

The unraveling of the euro is a plausible outcome and integration probably has less of a chance of success than a return to what I would call “deharmonization,” the breakup into individual states. The Euroskeptics of the last fifty years realized something the planners overlooked: arrogance cannot overcome nationalism, especially when the will of the public is overlooked.

Last and most tellingly is the view that democracy can be imposed without regard to the institutional infrastructure needed to sustain it. Voting is a slim reed on which to keep democracy afloat, albeit a necessary condition. Democracy requires individual rights, minority rights, private property guarantees, the rule of law, etc. The expression of the citizenry – while desirable – is often fickle and mercurial. It must be placed in a framework of guarantees. When the Arab street released the shackles of dictatorship, many analysts assumed the results would be flourishing democracies. At the moment these high hopes are being converted into Islamist codes of shariah that defy the framework for democracy. Ataturk may have been successful in imposing a form of democracy on Turkey, but this case appears to be the exception. Talk of democracy does not yield democratic infrastructure, as China among others indicates.

Clearly democratic institutions are more likely to instill stability than tyranny, but free elections can result in unfree conditions. While generalizations about Arab nations are foolhearty since Morocco, to cite one example, is very different from adjacent Algeria; I believe it is fair to say that for many the Arab Spring is emerging as the Arab Winter.

What these three illustrations have in common is an abiding faith in planning, notwithstanding history’s agnosticism about this subject. The planners believe they know more than the citizens they represent; they are more insightful than the “invisible hand” and they can use the power of their prodigious intelligence to overcome the traditions passed on through centuries. These grotesque failures prove a different point: hubris will inevitably lead to defeat. The grand schemes of the twentieth and twenty-first century have ended up on the rocky shoals of despair. False prophets are ultimately unmasked and what we observe at the moment isn’t a pretty picture.

But the beat goes on as yet another generation of dreamers schemes to reshape the world without regard to human impulses. It is as if the lessons of the past are to be ignored. Alas, that is the one matter I am confident will reoccur.

Big Peace