The planetary community faces a breathtaking economic crisis. It comes as a rude shock to many, particularly Baby Boomers who have little knowledge of the Great Depression of the 1930s, which I lived through and remember very well. Although I was only four when the 1929 crash occurred, I vividly recall its aftermath in the 1930s—the soup kitchens and bread lines, the widespread unemployment and the shanty towns that sprouted up in cities up and down the land. There was no Social Security, and people in retirement suffered; the health-care insurance system was woefully inadequate.
Many illusions grew out of that devastating period. In the 1930s, it was widely perceived that what we needed was more government programs and central government planning. Those days were marked by harsh criticism of capitalism; many people believed in some form of left-wing or socialist economy as the savior of humankind. The New Deal was introduced to rescue our free-market system. Unfortunately, by 1938 it was clear that a depression was returning as unemployment began to grow. The economy was saved only by World War II and the massive effort to re-arm.
After the war, socialist economies based on centralized planning stagnated. Incentives for entrepreneurial growth were dampened. Libertarian ideas began to gather momentum. Government taxation and regulation was widely condemned, and the free market was extolled again as humanity’s savior.
Given the current crisis, it is clear that both extremes are mistaken. A robust economy needs a dynamic free market to initiate innovation and entrepreneurship as well as government regulation and public programs that the private sector cannot support—a strong infrastructure, public-health facilities and public schools, highways and bridges, military defense, and investment in projects that private capital is unwilling or unable to finance.
Larry Kudlow, NBC’s perennial optimist, proclaims the triumph of capitalism, but it surely should not be “unfiltered” capitalism. Why? Because we now recognize the need for a balance between the private and public sector. This means mixed economies with a strong free-market component, government regulation and vital public projects.
Here are some further thoughts:
- An unregulated stock market can lead to abuse and chicanery—such as the Ponzi scheme attributed to money manager Bernard Madoff. The Securities and Exchange Commission was unable to protect the public from fraud. Effective regulation must be reintroduced to protect the public interest.
- The banking sector is not immune to rapacious conduct. Banks have charged exorbitant and usurious rates of interest, up to 30 percent for credit-card and consumer loans, which many poor and middle-class consumers are simply unable to pay off. There ought to be an upper limit on rates of interest. There should be some restraint on false advertising by banks of low-rate loans whose interest rates skyrocket at the first delinquent payment.
- Variable interest rates have been imposed on unsuspecting homebuyers who did not read carefully the terms of their mortgage contracts—and were subsequently hit with higher rates than they were unable to pay and forced into bankruptcies and foreclosures. Banks need to be more stringent in determining who qualifies for a loan. There should be some protection against predatory mortgage lenders who have abandoned standards of ethical conduct.
- The unlimited free market has destroyed manufacturing in many affluent nations in North America and Europe, with disastrous consequences for their societies. With the loss of jobs, we face a dilemma: free trade is important but not if it means the destruction of the manufacturing base of a country.
- Wage rates are being reduced in affluent countries because of competitive lower wage rates in emerging countries, such as India, Indonesia, and China. We cannot allow the poorest countries to set the wage scales of workers in affluent societies. A worker’s wage should not be determined by the cheaper wage rates paid in underdeveloped economies. Companies that send jobs abroad should at the very least not be afforded tax advantages in this country.
- On the other hand, we should not allow blind faith in government programs to destroy private initiative and innovation. We need to consider the free market—including small businesses—as the dynamic engines of economic growth and development.
- Last but not least, it is clear today that many economic and social problems can only be solved by transnational treaties and the emergence of new institutions that can set guidelines—such as the protection of the environment, restraining excessive pollution and over-fishing, credit practices that affect everyone, the need for a viable world banking system, international programs to reduce poverty and disease, a defense of human rights everywhere, and the recognition of the universal rights of children to receive a balanced education that includes both science and the arts.
The Obama administration faces a Herculean task in balancing these conflicting principles. We ought to avoid outdated ideological mantras—whether it be the view of government bailouts as a savior or of an unlimited free market as a panacea. We need to develop pragmatic policies that work without appealing to the simplified slogans of the past. In the last analysis, science and reason are essential if we are to solve these problems. This should blend an expression of goodwill with a sense of optimism that we can overcome our current problems.