A More Equal Capitalism

[Jim Manzi]

Megan McArdle correctly characterizes Hillary Clinton’s proposal to provide mortgage relief by legally prohibiting interest rate resets for years and foreclosures for months as a “terrible, horrible, no good, very bad idea.”  The obvious problem with this plan is that, while a pretty sweet deal for the people who get their debt unilaterally renegotiated by the entity that controls the army, it may become very hard to get lenders to enter into future contracts with customers who have marginal credit.  Of course, the government could subsequently address this problem by requiring that any lender who wants to participate in the US mortgage market must make loans on favorable terms to these consumers, and more to the point, voters.  The resulting cross-subsidies, combined with restrictions on exotic products, would inevitably lead to some degree of reregulation of the mortgage industry in the name of fairness and equity.

It seems to me that this proposal is a great example of the kind of ideas that liberals generally, and Clinton and Obama specifically, have been pushing to deal with the many political issues that are really various manifestations of one underlying problem: inequality has been rising steadily rising in the US for the past 30 years.  There are many reasons why inequality started growing in the late 1970s – the oil shocks, the transition to a knowledge-intensive services economy, the dismantling of the traditional family, massive immigration of low-skill workers and so forth – but the Reagan policy of deregulation has interacted with and exacerbated these trends.

The common philosophy underlying the relevant liberal proposals such as mortgage relief is therefore simple: reregulation.  On one level this is sensible, since reregulation can be used to decrease inequality. However, it holds a huge pitfall.  The reason that Reagan embarked on the deregulation process in the first place was that increasing international competition demanded this if the American economy was to continue to succeed.  The objective global conditions that had allowed

America to have it all – rapid growth combined with high equality – had changed for the worse by the late 1970s.  In economic terms, this has gotten much more severe since 1980 due to the economic rise of the Asian heartland.

There is no going back to the successful regulated economy of 1955, but there is also no denying the depth of the problem of inequality.  In an article on this topic in the upcoming National Review, I pose the resulting dilemma this way:

So here we have our current economic situation: we are rich and economically successful, but increasingly unequal.  If we give up the market-based reforms that allow us to prosper, we will lose by eventually allowing international competitors to defeat us; but if we let inequality grow unchecked, we will lose by eventually hollowing out the middle class and threatening social cohesion.  This, not some happy-talk about the end of history, is what “globalization” means for the US. ... Seen in this light, the challenge in front of us is clear: how do we continue to increase the market orientation of the American economy, while helping more Americans to participate in it more equally?