Monday, August 20, 2012

America's Real Problems

Back in the 1870s Walter Bagehot, editor of The Economist, wrote his classic book Lombard Street. It was an analysis of the Bank of England's role as guarantor of the credit system. What should the Bank do to deal with a panic in the money market? That was Bagehot's topic, after two big panics in ten years, in 1857 and 1866.

You'll be amazed to learn that his solution was not more regulation. No, he wanted stronger leadership at the Bank of England, a permanent manager rather than the rotating Governors. He wanted the Bank to realize that it had to do everything in its power to stop a panic and restore confidence, principally by lending money without limit on any good security. And he wanted the Bank to maintain a higher "banking reserve."

The foundation of the credit system, he wrote, is that most people are "sound." They maintain their assets in a prudent way, and cannot be sold out because of excessive leverage. His approach to the money market assumed that people are responsible, and that the governance of market institutions should encourage people to follow their instinct to be responsible and "sound." He thought that the soundness of the credit system was the responsibility of the credit system participants.

The contrast with our own time is palpable. Today, we don't trust the business sector to mind its own business. We believe, with certainty, that political oversight is essential to a smooth economic system. But how well does that work, in business and in the other areas of government?

Of course, political oversight means bureaucratic regulation, and effective political control of the economic sector, and the record of the last century is that the cure is worse than the disease.

Money.  Two hundred years ago, the credit system in the US was founded on a funded national debt and the government ran a surplus.  This meant that the dollar was rock solid and the government was not trying to manipulate the credit system to get out of a jam.  Today the government is always in a jam, and is always manipulating the credit system to keep its operations going.  The government regulates banks not to make them safer but to make them into useful conduits of government debt.

Education.  For two hundred years the ruling class has liked the idea of government-run education.  Maybe it had a point in the early 19th century when the people coming off the land into the city were often illiterate.  But now, in the United States, the education system spends about a trillion dollars a year to do--what exactly?  Most likely its real purpose is to indoctrinate students into the ruling class ideology.  In my view it is time to return education to the private sector, to churches, and charities.  And also revive the idea of apprenticeship--getting hands-on teenagers out of school and into the workforce.

Healthcare.  Everyone seems to think that without government nobody except the rich could afford healthcare.  I doubt it.  The vast majority of people buy food and transportation without government, why not healthcare?  The problem is that we really don't know what people want in health care, because the government so completely dominates the system that individual consumer preference is blocked out.

Work.  Used to be that workers worked for cash.  Now the government is right in the middle of the employment transaction in many different ways with regulations and taxes.  It's all meant to help the workers, to prevent exploitation and provide social benefits like unemployment and retirement.  Are we really so helpless that we need government right in the middle of everything?  And the problem is that all the taxes and regulation almost force low-skill employers just avoid the complicated and confusing formal employment sector completely, and hire people off the books.  How safe it that?

Environment.  The current top-down system assumes that ordinary people are helpless victims that cannot look after themselves.  Shouldn't we try to find environmental approaches that empower ordinary people to protect the environment?  Roger Scruton recommends a bottom-up approach based on the idea of "home."  People want to protect their home.

When Walter Bagehot wrote Lombard Street he admitted that it would be impossible to change the governance of the Bank of England because people just accepted the way things were and wouldn't support any change.  In other words, people won't agree to change unless things are broken.

That's where we are with America.  There are lots of things that aren't really working, but they aren't broken.  Not yet.

Do we really have to wait to fix things until they are completely broken?


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