The New York Times op-ed page has two excellent columns today, by Tom Friedman and Ross Douthat that should define the most important national debate in the coming year–about the role of banks (Friedman) and the government (Douthat) in our economic future. Should, but probably won’t, because the national IQ tends to plummet in election years and because these issues involve the long-term health of the nation, something we Americans have never been very good at planning and assessing.
Friedman, who pretty much defines the American center, joins some of us who have realized that President Obama did the wrong thing when he chose Lawrence Summers and Tim Geithner as his chief economic advisers, rather than Paul Volcker. Liberals like Paul Krugman were absolutely right on this one: promote competition–hardly a socialist goal–by breaking up the big banks, and then put some reasonable clamps on the financial services industry, which has grown too big and powerful for the health of the country. Here’s Friedman’s key paragraph:
We need to focus on four reforms that don’t require new bureaucracies to implement. 1) If a bank is too big to fail, it is too big and needs to be broken up. We can’t risk another trillion-dollar bailout. 2) If your bank’s deposits are federally insured by U.S. taxpayers, you can’t do any proprietary trading with those deposits — period. 3) Derivatives have to be traded on transparent exchanges where we can see if another A.I.G. is building up enormous risk. 4) Finally, an idea from the blogosphere: U.S. congressmen should have to dress like Nascar drivers and wear the logos of all the banks, investment banks, insurance companies and real estate firms that they’re taking money from. The public needs to know.
The best rule of thumb I’ve seen for evaluating how big is too big comes from Simon Johnson and James Kwak’s book, 13 Bankers. Right now, 10 banks control about 70% of us all U.S. assets. Johnson and Kwak propose a 5% limit–as well as a reimposition of the Glass-Steagall law that separated commercial from investment banking. I’m not sure that 5% is the right number, but there does need to be some reasonable limit–and Friedman’s rule is an absolute must: no gambling with FDIC-insured deposits, which means the Glass-Steagall guidelines need to return.
I’d add one additional point to Friedman’s five: a graduated transfer tax on financial derivatives, as proposed by Michael Lewitt in The Death of Capital, a book I’ve touted here before. Lewitt, no radical, is a well-known fund manager and financial writer. He believes that the more exotic the financial product, the higher the transfer tax should be–it would be lower on the trading of actual commodities futures, like corn or pork. The point is to discourage gambling and churning. The larger point is to make Wall Street a less lucrative occupation and try to lure our smartest young people away from the casino and into productive work–an absolute necessity if our economy is to thrive in the future.
Douthat is a conservative and he looks at the role government programs have had in the current budget dilemma. Here’s the core of his argument:
The story of the last three decades, in other words, is not the story of a benevolent government starved of funds by selfish rich people and fanatical Republicans. It’s a story of a public sector that has consistently done less with more, and a liberalism that has often defended the interests of narrow constituencies — public-employee unions, affluent seniors, the education bureaucracy — rather than the broader middle class.
The alternative to this liberalism should not, however, be the kind of reverse class warfare currently being championed by the not-Romney candidates in the Republican field, whose flat-tax fantasies would ask working Americans to bear more of the burden for public institutions that have been failing them for years.
Rather, it should be a kind of small-government egalitarianism, which would seek to reform the government before we pour more money into it, along lines that encourage upward mobility and benefit the middle class. This would mean seeking a carefully means-tested welfare state, a less special interest-friendly tax code, and a public sector that worked for taxpayers and parents rather than the other way around.
I’ve often argued here that liberals have a responsibility to make sure that the programs they favor, and which I also favor–from Head Start to Social Security Disability to environmental regulations–actually work in the real world. The industrial era welfare state, and regulatory apparatus, needs to be overhauled–not scrapped, as the right-wing insists–but modernized for the Information Age.
These two huge questions: how to make the economy productive again, while taming the Wall Street casino, and how to make the government an instrument of progress rather than a hindrance to it, are the biggest issues we’re facing right now. They should be the heart of our national discussion during the next year. Unfortunately, I don’t see any politician, of either party, willing to take them on.