Phil Gramm was in the news yesterday after he declared that the U.S. is in a “mental recession” not a real one. Gramm is technically correct. Although the economy is in sharp decline, the condition normally used to define an economic recession — two successive quarters of decline in Gross Domestic Product — has not been satisfied. However, Gramm is one of the main economic advisers to the McCain campaign, and was acting in that capacity when he made his comments in an interview with the Washington Times. As an economic adviser to the campaign, Gramm’s role when speaking to the media is not to make every conceivable true statement about the economy; rather his role is to make true statements about the economy that will assist McCain’s candidacy.
Gramm’s comments embarrassed, rather than assisted McCain. And his political cluelessness reminded us of why he was such a dreadful candidate for president in 1996.
E.J. Dionne is clueless at another level. Yesterday, he effectively declared the crisis of modern capitalism. This reminded me of my days as a student radical when, every three months or so, my colleagues would seize upon some bit of adverse economic news as the basis for claiming that the final crisis was at hand. Dionne has a somewhat higher threshold than my radical cronies did. But then, he isn’t 22 years old.
An economic recession — if that’s what we end up with — after years of sustained economic growth is not “a world-wide crisis” that properly “discredit[s]. . .taken-for-granted economic ideas.” The free market ideas that Dionne agrees have held sway since the early 1980s helped produce economic growth in approximately 90 percent of the quarters since then. That’s significantly better than the economy performed during the preceding “New Deal era.” The current situation might well justify certain reforms within the banking industry. But it certainly doesn’t warrant a significant increase in government control over the economy, including control of investment decisions, much less the “managing” of globalization that Dionne (per Barney Frank) seems to be calling for.
Dionne, though, isn’t just arguing in favor of abandoning prevailing free market notions; he’s also predicting (and expressly hoping) that the current difficulties will cause these notions (rightly or wrongly) to lose support. In this sense, he’s encouraging the “whining” and the “mental recession” Phil Gramm was talking about. He is also doing what a certain kind of liberal always does — seize upon the economic setbacks that inevitably occur under every economic system (though much less often in a free market regune) to push for increased governmental control of our economy and our lives.
And this is where the real potential for crisis lies. The Great Depression was less the product of “the radical laissez-faire doctrines of the Coolidge era” (as Dionne asserts) and more the product of arbitrary meddling by the federal government. As Amity Shlaes has demonstrated, it was this whirlwind of mostly mindless activism, first by Hoover and then by Roosevelt, that converted a serious downturn into a depression.
If Dionne’s perverse cheerleading carries the day, we could see a repeat performance.
UPDATE: I just saw that Shlaes has written a piece for the Washington Post called “Phil Gramm Is Right.”