I've been thinking about where we were a year ago and how it stacks up with where we are now. This is what I wrote on December 1, 2009. Somehow, in the intervening months, Mr. Potter has appealed to enough people politically to redirect the nation back to Potterville. At least that is what I believe will happen if our newly come to power political leaders really do believe that regulators are there to serve the banks and bankers. I'm not sure I understand how this has come to pass, but it discourages me in this holiday season.
A few days ago, Brad Delong posted a good blog on Why Good Macro Policies are Political Losers, which in my opinion misses the point in some ways. (Specifically where he said: "The fact that investment bankers did not go bankrupt last December and are profiting immensely this year is a side issue.") I contributed to the comments, but I want to expand a bit here.
Joan Robinson (girl economist) said something in her Richard T. Ely Lecture to the American Economic Association in 1972 during another economic crisis that I believe accounts for some of the "political loser" characteristics of good macro policies:
"A sure sign of a crisis is the prevalence of cranks. It is characteristic of a crisis in theory that cranks get a hearing from the public which orthodoxy if failing to satisfy. ... The cranks are to be preferred to the orthodox because they see that there is a problem."
I believe that the failure of "good macro policies" to be political winners is that they "fail to satisfy" on the dimension that matters most and is most visible and understandable to the public: fairness or justice.
Research in behavioral econ indicates that people care about fairness and are willing to take a loss in order to inflict pain (i.e., a loss) on someone who has failed to cooperate or who has been unfair. This is a direct contradiction of the assumptions underlying neoclassical econ theory where more is always and everywhere preferred to less.
Research also shows that people's sense of fairness can be engaged simply by shaping the information they receive about a situation. Someone perceived as receiving an unfair advantage or someone perceived as taking unfair advantage elicits a desire to punish them. For this reason, narrative matters. The story that accompanies a redistribution of income, say, will shape perceptions of fairness. Think "Robin Hood" here. Except among devotees of the late Ayn Rand, Robin Hood is nearly universally regarded as a good guy because he stole from people who were not only rich, but also corrupt, exploitive, unproductive aristocratic thieves to (in effect) return to hard-working peasants in a feudal society the product of their labor. It's hard to imagine how you can turn him into a villain, unless you tell a story in which the people he is stealing from are in fact the wealthy, productive members of society whose earnest and honest labors benefit the lazy, ne'er-do-well, grasping masses who desire only to loll about while others supply their provender. Think "welfare queen."
See how easy it is?
With the approach of a major Christan High Holy Day, 'tis the time of year when Frank Capra's film, It's a Wonderful Life, with Jimmy Stewart playing everyman's banker, George Bailey, and Lionel Barrymore cast as "old man Potter," banker to the Scrooges of the world, will be ubiquitous. I think the story is particularly salient this year in understanding public sentiment about the bailout. The movie culminates in the town bailing out George Bailey, the man who made their homes and housing developments and good lives possible, after money goes missing from his bank. The town folk gather, every one of them well aware of the ways in which Bailey has enriched their lives by extending credit at affordable interest and reasonable terms. If there's any doubt in the viewer's mind that Bailey deserves the town's forgiveness and largess, she has only to reflect on the scenes (shown to a despondent Bailey by Clarence the Angel) of Bedford Falls as it would have been had Bailey never lived. In that scenario, it is Potterville, a dark and dreary place where homes are ill-made, employment is only in Potter's companies, and everyone is in debt to wealthy, avaricious, cold-hearted Mr. Potter.
People in the US who are living with unemployment, no health insurance, and home foreclosures don't have Clarence the Angel showing them what their lives would have been like had Wall Street not been bailed out. They do not see the counterfactual (what the world would have been like with out the stimulus). All they see is something that looks worse than it used to be with no sign whatsoever that Mr. Potter has any intention of helping to restore Bedford Falls to its former economically sound and thriving state. On top of that, they get to watch Mr. Potter skate away fatter, richer, with health insurance, AND speculating on the next financial bubble no matter where it might be and no matter what the consequences to the people of Bedford Falls.
Is it any wonder then that good macro ideas are political losers? Much of the US is staring at Potterville or watching their own little Bedford Falls morph into Potterville. On top of that, old man Potter is raking in money again, while the people of Bedford Falls (soon to be Potterville) are staring at empty houses, lawns that haven't been mowed, unemployment figures that strike fear in the heart of every hard working, god-fearing man and woman who prides themselves on paying their own way and being beholden to no one.
Mr. Potter (i.e., Wall Street) must feel some pain and it needs to be soon (and more than a $500 million "donation" back to the people who bailed him out). And it needs to be pain that only Wall Street and it's shareholders feel. Most of the US is probably willing to take a hit to punish them. It would satisfy our hunger for some justice and it would help with the moral hazard that almost certainly has grown to large proportions because of the no-strings-attached bailout.
If the elected lawmakers in the US Congress and the elected chief executive are unable to muster the will to inflict pain on Mr. Potter, then they had better get busy bailing out Bedford Falls. This has nothing to do with political party or ideology. This is about the hard-working people of Bedford Falls... I mean the United States... who deserve better than to bailout out Mr. Potter and then watch him foreclose on their homes because he can't bestir himself to restructure their underwater loans.
If they don't, sound macro policies will continue to "fail to satisfy" moral sentiments about fairness and will continue to be political losers to the detriment of us all.