When Other People’s Money runs out
The United States is one of the last places in the world where the excesses of capitalism can be witnessed in all their bipolar glory. Like the mad creative genius that it is, our system every now and then whips itself into such a manic froth that sooner or later it crashes, seemingly hell-bent for depression. Our recent financial crisis was one of those periodic nervous breakdowns.
What’s going on in Europe today is a remake of that movie, only this time filmed by a socialist director. It’s a debt crisis, just like ours. It may prove just as serious. And in its own way it is just as characteristic of the system that spawned it. If American capitalism came close to suicide in 2008, the European welfare state now seems no less bound for self-destruction, even if the process occurs in slow motion.
The similarities between the two crises — one sudden, the other still unfolding — are illuminating. Both, after all, are about excess: the excesses of capitalism on our side, and the excesses of socialism on the other. In both cases, these excesses are based on what is known among investment pros as OPM, which stands somewhat disdainfully for Other People’s Money.
In America, as is our wont, the crisis was preceded by roaring growth and unbridled private consumption. The culture of thrift broke down, along with standards of behavior in boardrooms and banks. Government regulators fell down on the job too, perhaps sensing a lack of political will to take away the punchbowl while people were still having a good time. The near-meltdown we foisted on the world was the result of capitalism run riot.
In Europe’s economically troubled peripheral states, the crisis comes from the slow but steady accretion of good intentions. Unlike capitalism, collectivization runs riot at a snail’s pace in democracies. But there, too, culture broke down — the culture of self-sufficiency, which is always at risk in a welfare state. And just as they did here, people there spent more than they earned, even if their governments did the borrowing and spending for them. In both places, elected leaders are loath to let creditors take a bad haircut for fear of dragging the entire system down.
In both Europe and the U.S., moreover, easy money has been at the heart of the crisis. Here, Alan Greenspan and the Chinese gave us too much credit, which pumped up home prices, which led to even more borrowing. In Europe, countries such as Greece got to trade in their second-rate currencies for euros, which enabled cheaper borrowing — and that much more spending and tax evasion.
Attitudes toward lenders, who in both Europe and the U.S. seem at last to have awakened from their greedy trance, are remarkably parallel. Over here, people are mad at bankers and investors for lending us so much in the first place. And over there, anger arises because lenders are increasingly unwilling to lend at all, potentially leaving Greece and God knows who else unable to finance their deficits. It’s remarkable that in both capitalism and socialism, the trouble is the same: Sooner or later you run out of OPM.
If the recent American financial crisis filled our European frenemies with delicious Schadenfreude, it now seems that it’s our turn to take pleasure and say “I told you so!”
Yet just as it was premature for the Europeans to take too much satisfaction when the shoe was on the other foot, so too would it be a mistake for us to get too comfortable in the discomfort of the Eurozone.
The reason is that, federal deficits notwithstanding, at the state level our politicians too have made reckless promises to public employees in exchange for labor peace and electoral support. California and New York, to name two of the prime offenders, have for years blended budgetary profligacy with political dysfunction. Rebellious taxpayers, crushing pension obligations and a longstanding reliance on accounting tricks could bring Sacramento and Albany some American version of what Athens is suffering in Europe. Like the latter capital, the former have no domestic currency they can devalue.
Yet all is not grim. Just as the recent American crisis wasn’t nearly enough to knock off capitalism, the European crisis won’t finish off socialism. Ideally, each side will learn something from the other, and we’ll all muddle through with our chosen hybrids, socializing some things and privatizing others in some new combination that suits our national character and history. Taking such a middle path will always seem dull, but perhaps we’ve all had quite enough excitement for a while.
Daniel Akst is a public policy fellow at the Levy Economics Institute of Bard College in Annandale-on-Hudson, N.Y.
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