Learning the limits of supply, demand
For a generation, most people accepted the idea that the core of what makes America tick was an economy governed by free markets. And whatever combination of goods, services and jobs the market cooked up was presumed to be fine for the nation and for its citizens -- certainly better than government meddling.
No longer.
Spurred by the continued housing crisis, turmoil in financial markets, spiking oil prices, disappearing jobs and shrinking retirement savings, the nation and its political leaders have begun to sour on the notion that the current market system is the key to a fair, stable and efficient society.
“We’re at a hinge point,” said William A. Galston, a senior fellow at the Brookings Institution in Washington who helped craft President Clinton’s market-friendly agenda during the 1990s. “The strong presumption in favor of markets, which has dominated public policy since the late 1970s, has been thrown very much into question.”
Now, to a degree not seen in years, politicians and outside experts are looking with favor at more, not less, government involvement in the economy.
Of course, Americans always grouse during troubled times. And as market advocates are quick to point out, the current run of bad economic breaks has yet to result in the throwing over of free-market principles in favor of some drastically different approach -- such as a government-directed economy.
“There may be a backlash against markets at the moment,” acknowledged Kevin A. Hassett, economic studies director at the American Enterprise Institute in Washington and an advisor to presumed Republican presidential nominee John McCain. “But the backlash doesn’t seem to be informed by any alternative view of how the world works.”
Yet the sheer volume of setbacks that people have been dealt has sent consumer confidence to some of its lowest levels in half a century, according to Reuters/University of Michigan surveys. A remarkable 84% of Americans are convinced that the nation is on the “wrong track,” according to a recent Gallup poll.
In just the last week, the financial markets have provided ample new evidence that markets are not working smoothly.
Washington had to ride to the rescue of two government-chartered mortgage giants -- Fannie Mae and Freddie Mac, which hold or guarantee nearly half of the nation’s $12 trillion in mortgage debt -- after investors all but extinguished the pair’s market value amid fears that falling home prices would push them into insolvency.
Meanwhile, federal regulators seized IndyMac Bancorp, a $32-billion mortgage lender based in Pasadena, in what regulators called the second-largest bank failure in U.S. history. And the already battered stock market took another sharp dip.
The fact that experts keep pushing back the date when conditions may improve and the failure thus far of any national leader -- including either of the major-party presidential candidates -- to offer a convincing vision of how America will make its way back to sustained prosperity suggest that the current crisis will probably be very different from other recent economic bad patches.
So may Americans’ reaction to it.
Even the Bush administration, which took office arguing that the Social Security crisis could be solved, in part, by tying some of retirees’ future benefits to Wall Street, has begun advocating more government regulation of financial markets. When Fannie Mae and Freddie Mac, which are government-chartered but investor-owned, began to teeter last week, the administration quietly went to work on possible government action.
“If the pendulum swung away from government toward much greater confidence in markets during the last generation, the pendulum is clearly swinging back again now,” said Daniel Yergin, whose 1998 book with coauthor Joseph Stanislaw, “The Commanding Heights,” chronicled the worldwide spread of the free-market credo.
“Everything is weighing in at the same time, and that affects how people view markets and government,” Yergin said.
“Nobody in this country really believes in unfettered free markets, and nobody really believes in socialism,” said UC Davis historian Eric Rauchway, but economic crises of the past have produced constituencies favoring the reining in of markets and regulation of the economy -- constituencies that ultimately grew large enough to produce change.
Consider just a few of the things that are pushing people in that direction now:
The price for a gallon of regular unleaded gasoline has nearly doubled in the last year, while that for a barrel of crude oil has more than doubled, cutting short Americans’ love affair with gas-guzzlers and driving the nation’s trucking, auto and airline industries into deep trouble.
Most mainstream economists assert that these increases are simply the logical outcome of booming global demand meeting limited global supply.
But the price run-ups seem out of whack with demand, which has increased only about 1% worldwide. The mismatch has fueled suspicion among many Americans and their political leaders that the third financial bubble of the decade -- after tech stocks and housing -- is underway, this time in energy.
Both presidential candidates have fingered market speculators, rather than the forces of supply and demand, for helping drive up prices.
At a recent hearing, Rep. John D. Dingell (D-Mich.) cornered the federal official whose agency regulates the market where oil futures are traded. “How is it that the market isn’t working to the benefit of the consuming public?” the lawmaker demanded.
The agency has launched a number of studies to discover whether speculators are behind the price increases, the official answered.
“Don’t tell me you’re doing studies!” Dingell shot back. “You’ve spent more than a year sitting idly by” while oil prices jumped.
At least half a dozen measures have been introduced in Congress to limit speculation or to tax oil company profits.
Similar anger -- and similar legislative efforts to intervene in the marketplace -- can be seen in housing.
While Americans have been accustomed to some fluctuation in the value of their homes, most expected their houses to rise in value over time. And for much of the last several decades, that’s what happened.
But starting in mid-2004, the upward arc of house prices began to flatten, and by 2007 it was falling -- sharply. Prices, especially along the West and East coasts, have skidded as much as 16% during the last year alone, their steepest decline in two decades. Many analysts predict further slippage.
In large part, the rise in house prices and the recent plunge grew out of an almost unregulated corner of the mortgage market -- the one for riskier loans.
As with fuel, “the message that Americans are getting is that something went wrong with the markets and you got hurt,” said economist Robert E. Litan of the Brookings Institution and the Kauffman Foundation of Kansas City, Mo.
“With energy, it’s the speculators. With housing, it’s predatory lenders or crummy credit-rating agencies or stupid banks. We’re not ready to throw out markets altogether,” he said, “but we want government to do something about the excess.”
A similar pattern of hopes raised and hopes dashed shows up in global trade and retirement investing.
Americans entered the new century convinced that “we had a new economy built on services and information technology that would let us win globally,” said Harvard economist Robert Z. Lawrence.
“The whole premise of globalization in the year 2000 was that it worked well for us and the other developed countries but that the developing countries would need help,” Lawrence said.
Today, virtually all those optimistic assumptions have been turned on their heads.
“We’ve seen unprecedented growth in the developing countries, while the developed countries are being led into a slowdown by the United States,” Lawrence said.
“We’ve found out that instead of services and information technology, it’s all about oil and other commodities” that are not the nation’s strong suit.
Finally, when it comes to investment, especially for retirement, recent years have brought unsettling disappointments as the stock market has failed to regain and maintain the peaks that it reached in 2000.
An investor who put a dollar in a broad market index fund early in this decade not only would have made no money by today but would have lost a little of his initial amount.
That’s a far cry from the 1990s, when people told pollsters that they expected to make 15% annual gains indefinitely.
Historians watching the nation’s current economic and financial troubles say that just because Americans don’t throw up their hands about markets and rush to an opposite pole, such as socialism, it doesn’t mean that change isn’t underway.
As UC Davis’ Rauchway pointed out, the devastating panics and depressions of the late 19th century eventually resulted in the progressive reforms of the early 20th century and, later, the New Deal of the 1930s.
Today, Americans are not ready to throw out markets altogether, said economist Litan, but “what people may be demanding is New Deal lite.”
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