Prof. Dr. Axel Weber addressing the audience. Photo credit: Hertie School of Governance

The State – “An Instrument of Good” Beyond Regulation?

Upon taking the podium, Prof. Weber likened the current challenges of policy makers and regulators to jogging. Especially when running uphill, he said, we like to focus only on the next few meters in front of us, so as not to be discouraged by the daunting climb that ultimately lies ahead. Managing the credit crunch, the central banker suggested, was similar: faced with an overwhelming crisis, we run the risk of loosing out of sight the medium term goals of regulatory reform in the short term struggle to provide liquidity and stimulus to shrinking economies.

I thought the analogy was powerful, but wondered whether really, we had yet lifted our heads high enough from the fierce economic imperatives of now to dare a look at the broader implications of the crisis, or maybe, the bigger questions it poses.

Mr Asmussen, towards the end of the discussion, posed a dilemma, which indeed begged some as of yet unanswered questions. He eloquently described what he called a “time inconsistency” problem of the short and medium term responses: For example, we want banks to deleverage, but cannot afford it right away, as it would worsen the credit crunch. We need American consumers to save more, and spend less, but further losses in consumer demand threaten to worsen the recession. Also, we have long identified the importance of balanced budgets, especially with aging populations in much of the industrialized world, but, for the moment, heavily rely on deficit spending to boost the economy.

I asked the panel whether from this dilemma, and the crisis in general could not arise the instrumental chance and moral obligation to consider a broad, internationally coordinated agenda of redistribution and increasing public spending ratios to boost production as well as to remedy the crisis’ excessive inequities.

Mr Asmussen responded that increasing the public spending ratio would be “overshooting” and threaten a sound balancing of market and state. Prof. Dr. Beatrice Weder di Mauro, member of the German Council of Economic Experts, added that increasing budget deficits would be no solution.

Regrettably, I find that Mr Asmussen’s dilemma and my question remain unanswered, even unaddressed both in instrumental-rational and moral terms. 

Instrumentally, the question stands whether, when investors hoard capital, markets freeze up and economies slide into sub-equilibrium production, a redistributing and spending state would not be welfare-enhancing. Stimulus spending, these days, is largely consumption stimulus and exclusively deficit spending. This, I would argue, is one specific and dysfunctional way to increase the public spending ratio. What about a state then, who stimulates exclusively investment and spends raised wealth taxes on assets (not capital incomes) ? 

State financed or incentivized investment, to be sure, has to be – and can - be market efficient, when sound government procurement is the rule and incentives are well-designed. The state and the market, are not always diametrically opposed options of how to allocate scarce resources: just like private capital, the state can use the market, too. Specifically, the state could pump resources into public goods, which free markets typically leave underprovisioned or incentivize long-term investments in innovations, where capitalists’ time horizon may otherwise be too short. For example, we could finally move towards making education the silver bullet to almost all our problems, we could massively expand public transportation to become more sustainable and mobile or we could further help to hasten the advent and spread of green technologies.

Some of this, to some extent, is already part of present stimulus packages in Europe and the US. But so far, all of this is deficit financed, worsening Mr Asmussen’s dilemma and limiting the possibilities for generations to come. Seeing that privately owned capital, at least these months, does not seek its most efficient use, why do we not tax some of these assets (not their incomes), and let the state put these resources to productive use? Why not use the momentum of this crisis to address the quintessential economic cooperation problem of globalization and agree to multilaterally tax internationally mobile private capital?

This points to the intrinsic, maybe even moral value of increasing public spending ratios in this crisis. Evidently, the excesses, slumps and bailouts redistributed resources in our societies, and between them, although the direction and magnitude of redistribution is less clear. One of the loosers will surely be the taxpayer. Who gains? Lavish consumers in the US? Investors? Building industry and consumer good producers? None of the above?

No matter in which direction, redistribution happened, and in the form of bad banks, moral hazard or illiquidity defaults, it is going to be with us for some time. When the market redistributes, at least the question arises whether the state should counteract to re-establish equity, a question which remained conspicuously absent from “The State and the Financial Crisis”. Also the widespread and justified anger about incompetent managers and reckless investors begs the question whether the state should respond.

“The State and the Financial Crisis” provided a thoughtful and inspiring debate on the regulatory implications of the crises and left no doubt about the competence, well-meaning and determination of the discussants to manage this crisis and prevent future ones from happening. 

But the state they talked about, was a merely regulatory state. Redistribution and intervention remained the unaddressed elephants in the room. A little bit disappointed by this minimalist portrayal of the state I was reminded (yet again) of different sentiment I recently heard on the West Wing. A sentiment, by which the state is “an instrument of good”, where “people come together”, and, I would add, not just a watchman for the market.

“The era of big government is over. (…) I want to change the sentiment. [pause] We’re running away from ourselves and I know we can score points that way. (…). We have to say what we feel, that government, no matter what it’s failures in the past and in times to come for that matter, government can be a place where people come together and where no one gets left behind. No one… gets left behind. An instrument of good.”

Fictitious White House Communications Director Toby Ziegler on Aaron Sorkin’s TV show “The West Wing“.

Not Enough Questions Asked

The answers to the financial crisis, are more difficult than this fictional sentiment. And the discussants at today’s “The State and the Financial Crisis” made every effort not to make answers any simpler than reality permits. For this, I am grateful to the panelists and Hertie’s  organizers.

Also, I do not mean to imply that “more state”, let alone the shorthand way argued for it here, would provide an easy, if any, answer to the crisis. The state has a particularly lousy track record of efficient incentivizing and procurement, the democratic process is easily plagued by earmark projects and excessive public spending can be a drug very hard to wean us from, when we no longer require it.

Notwithstanding these well-founded reservations towards “more state” I have an uneasy feeling that the experts present today, the questions posed in the discussion and the solutions presented are, by and large, from the regulatory-only, maybe even neoliberal camp.

It is possible that these answers are in fact the only feasible ones. 

But to pose and explore the broader questions and invite more critical panelists surely would have added to the event, possibly including some of those who protested against the event in front of the school. Intellectual insulation seldom has any utility. At the very least, challengers of regulation-only would have allowed me and my fellow students of public policy to appraise their arguments and to learn, maybe, how their answers were simple and flawed.