Fanny, Freddie, and the Case for Social Democracy

A broad ideological point while I continue to try to figure out what’s actually going on with the government’s re-acquisition of the GSEs — they say there are no atheists in foxholes, and by the same token there are no free marketeers in a financial crisis. Which reminds us that while we (mostly) use market mechanisms to set the prices of (most) stuff and do so for the very good reason that this encourages people to produce goods and services people want in appropriate quantities, that market activity doesn’t add up to anything like the “free market economy” of popular myth. Market transactions take place within a legal and institutional framework that involves many public choices at many points, choices that can (and are) made in different ways at different times and with different beneficiaries. We mostly don’t notice this stuff either because it operates silently in the background (copyright and patent law, say) or else because the changes tend to be small at any given point (Fed interest rate shifts) but when crisis strikes it leaps into the foreground.

And there’s nothing wrong with that, in principle. Faced with something like the Bear Stearns meltdown, it would be absurd for public officials to step aside and just “let things play out” irrespective of the damage done to the economy merely in order to bring practice into closer alignment with free market rhetoric. But by the same token, an obligation exists to make sure not just that the economy “works” instead of collapsing, or works just for the richest and best connected, but rather works for everyone who’s willing to work hard and contribute constructively to society insofar as he or she is able. At various points in the past, the economy has worked like that. In recent years it has not. We need to make it work like that again. Whether or not the current tendency of the rewards of economic growth to accrue almost exclusively to a small minority is the result of some kind of malfeasance is not, at the end of the day, really relevant. Insofar as it’s the result of shifting structural factors, the correct response is to use public policy to create counter-structures that will rebalance the situation. In addition to direct labor market interventions like the Employee Free Choice Act, if greater overall levels of economic production no longer benefit most people for “natural” reasons then we need to capture a larger proportion of that production and channel it into public services — schools, health care, parks, safe streets, reliable buses, new rail connections, clean air — that benefit everyone.