How to Restore Faith in the U.S. Economy: Make it Fair

The Washington Post's Robert Samuelson says Americans are unduly pessimistic about the economy, arguing that "Not since World War II has an economic recovery been so hobbled by poor confidence."

Confidence is, of course, an important driver of the economy. But it's not the only "animal spirit" that shapes people's attitudes toward spending, consuming and investing. There's another key factor, frequently overlooked by pundits: fairness. Why is a bit of mystery, because the business cycle isn't connected only to financial inputs, like a wooden boy that dances a jig if you tug the right strings. It also links directly to what economists George Akerlof and Robert Shiller have called "fluctuations in personal commitment to principles of good behavior."

That's one reason why, as Samuelson suggests, recessions follow economic crises, in which lapses are as much ethical as financial. In other words, consumers and businesses aren't hoarding their pennies merely because of concerns about the wobbly stock market and a scarcity of good jobs. It's also because of a persistent feeling that the economy is fundamentally inequitable. The rich and unscrupulous -- Wall Street, oil companies, insurers -- get bonuses and bailouts, while average schmucks get a pink slip. "Too big to fail" isn't regarded as anathema to the free market, but rather as a goal of corporate strategy.

It's no wonder we lack confidence. Even as financial reform trundles along in Washington, evidence of the kind of misbehavior that led to the crash still permeates the American economy. Banks and hedge funds fling derivatives around like confetti at a parade. Credit rating agencies rent themselves out like the high-priced escorts that they are. Financial firms try to block restraints on predatory lending. "Flash crashes" cripple the stock market, as big securities firms use high-speed trading to hurtle by other investors. Giant corporations rake in profits while skipping out on taxes.

Will Congress legislate such practices out of existence? We'll see (If it does, you can be sure new rackets will emerge.) In terms of the national mood, however, the damage is done. That's what's really corrosive about the kind of malfeasance that accompanies major financial crises -- the sense that we let it happen. And we did. The rot doesn't contain itself to the Bernie Madoffs and Countrywides of the financial netherworld. Such rip-off artists are effects, not causes. Rather, it seeps into society's pores. Anyone need a mortgage? Why, just bump up your annual income on this application form. Financial regulations? Who needs 'em! The market knows all, and my 401k is just on fire, by the way.

And here's where Samuelson really gets weird. Rather than connecting the nation's current lack of confidence to, say, the rampant deregulation that led to the collapse, he points to that usual suspect: The government. He specifically attacks the Obama administration's "anti-business rhetoric" and health care reform:

These policies created uncertainties and fanned partisan rancor.... The administration believes these various policies don't hamper economic recovery. It ignores contradictions and inconsistencies.

Indeed, Samuelson has it exactly backwards. Sagging public confidence isn't hobbling the economy -- the economy, and its underlying inequities, is hobbling confidence. To regain the confidence that he correctly identifies as critical for the nation's welfare will require more than exhortations to jump back in water. It will require restoring a sense that the financial industry, the markets and the economy at large give everyone the same shot.

Image from Wikimedia Commons, CC 2.0 Related:

• Skinning America: How the Tax Code Favors the Rich
• As Income Mobility Falls, American Dream Fades
• If Obama Wants to Clean Up Wall Street, Now's the Time to Take Off His Gloves
• Street Fight: Time to Send Bankers to Jail
• Why Financial Reform Hinges on Defusing Derivatives
• Countrywide's Foreclosure Scam: It's Not the Only Lender Ripping Off Homeowners