Lessons from the Current Crisis

I’ve gathered together my thoughts on Wall Street Socialism, developed as squibs on this blog, into a National Post op-ed, available here. As they say in the vulger jargon of the blogosphere, this is the money quote:

The current crisis is pregnant with political and economic lessons. The problem with Wall Street Socialism is not just that it’s hypocritical but that it doesn’t go far enough. The Federal Reserve has already tossed a trillion dollars into the market in a futile attempt to stop the current crisis from spreading; much more will be spent before financial health returns. 
If we can afford socialism for the rich, we can certainly also have socialism for the poor. If government is needed to bail out the rich in times of crisis, let’s have a more sharply progressives tax structure, so that the beneficiaries of the current system who are so sheltered from risk pay their fair share. If the state is so willing to intervene to protect the financial status quo, there is no justification for the increasing income inequality that has characterized contemporary capitalism.

6 thoughts on “Lessons from the Current Crisis

  1. Jeet
    While I agree with you that the intervention poses a sever contradiction to the philosophy of many of the hard right economic conservatives, I take issue with the idea of this representing socialism for the rich. If banks fail, everybody fails- banks supply mortgages, and banks hold EVERYBODY’s funds. Even putting aside any points about shareholders and employees, banks are simply not in the same class of institution as other large corporations. You may take some schaudenfreude at such institutions failing, and their heads being proven incompetent, but the glow won’t last.

  2. Hi David,

    I agree that banks are essential institutions and for that reasons the bailouts are justified but isn’t that the precise definition of socialism: having the government run or pay for essential services. In fact, what we have is really a mongrel form of socialism where the risks are socialized (shared by society at large) and the profits are privatized.

    Banks are an essential part of the economy and deserve protection and government support: hence we have Wall Street socialism. But why stop there: health care is essential for people to stay alive: we need socialized medicine. And the eco-system is essential for the continued survival of humanity (and many other life-forms): so we need environmental socialism.

  3. 1) Socialism = redistribution from the wealthy to the poor.
    Socialism is NOT a scheme whereby everyone benefits, (although it can be).
    Socialism is NOT ‘having the government provide services’ because fascist countries also can provide services, but to the wealthy or well-connected and socialist countries can decide to not deliver services, but fund them.

    The reason why you should adopt this insurance scheme for Wall Street is not because it is socialist, but because it insures us against a risk we want to be insured against.
    Whether or not it is worth it depends on whether or not the benefits outweigh the costs. That is not determined by whether or not it is redistributive with respect to income. The scheme could be regressive with respect to income, in the sense that, on balance, poor people are paying money to rich people, and yet it could still be the case it would be better for poor people to adopt it than to not adopt it.

    Consider, for instance, a fire insurance scheme, if the premiums you pay are lower than your expected utility from the loss of your home, then you should purchase fire insurance, regardless of how much you have to pay relative to what other people have to pay. If, on the other hand, the scheme is so regressive that it actually means that it is not worth it for the poor, then it should not be adopted – but that is a function of a comparison between benefits and costs and not between relative costs.

    But I do agree that it follows from this that there are many more insurance schemes that should be considered due to the benefits or risk-pooling: In particular, socialized dental insurance, accident compensation insurance, eye care insurance, litigation insurance, etc

    Anyway, it is not obvious that the poor benefit from the insurance scheme. While it does not matter if the scheme is regressive, neutral or progressive, that analysis is useful in showing how it bestows an absolute disadvantage.

    The scheme has an insurance and financing mechanism. The insurance mechanism is regressive because the wealthy appear to be at greater risk. They benefit disproportionately from the current economic system, and stand to lose much more from its disintegration.
    Conversely, the poor could potentially, in the long run, benefit from the collapse of such a system if it were replaced either with a new, more equitable system, or reforms to the existing system that are of greater benefit to them, as occurred in response to the Great Depression.

    The financing mechanism is regressive because it cannot be separated from the insurance mechanism because the insurance mechanism allows for the progressive financing mechanism in the first place, so the fact that the financing is progressive is irrelevant and cannot outweigh the regressive nature of the insurance scheme. The scheme as a whole is regressive.

  4. Adrian,
    Thanks for your very informative comments. I should note that there was a tinge of irony in the phrases “Wall Street socialism” and “socialism for the rich”.

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