Embracing Theoretically Creative Destruction

Don’t argue with dead European economic theorists. They’re dead. What they say may not pertain now, but then one can’t escape them, and the Austrians are the worst, probably because these days all totally-unregulated-free-market conservative thinkers claim to be members of the Austrian School – the former Viennese crackpots whose theories became all the rage in the seventies, forming the basis for the supply-side economics that everyone on the right argues now. It’s pretty simple. Strip away all the fancy prose and what’s left is basic trickle-down economics. Demand doesn’t matter, supply does, so all economic policy should be aimed at handing out everything possible to the very wealthy, encouraging them to create new businesses and open new factories and hire a few people here and there, even at low wages with no benefits and with awful working conditions. Do that and businesses will prosper, thus creating a healthy economy. The insatiable greed of the very rich, to accumulate even more vast wealth, is a good thing. Harness it. Demand will follow, eventually, probably – some poor losers somewhere will one day make a few extra bucks so they can buy the new gizmos, or whatever the wealthy job creators are cranking out, precisely because they got massive tax breaks and no rules restricting their economic and social behavior in any way.

That’s the gist of it. You’ve heard it from Mitt Romney and Paul Ryan and Rick Santelli and all the rest. It’s been in the air for decades. It’s actually been in the air since FDR said it was all horseshit and gave America his New Deal, with Social Security and unemployment insurance and all sorts of banking and financial regulations, including the FDIC and the Securities and Exchange Commission. That may have saved us all in the Great Depression and kept us safe since then, but the right has not forgiven FDR yet, nor Lyndon Johnson for giving us Medicare and Medicaid and Head Start and all the rest. Heck, they barely forgive Richard Nixon for creating the Environment Protection Agency, which has hobbled American corporations ever since that fateful day Tricky Dick betrayed the noble job creators who had trusted him to keep them free. There’s not a Republican now who doesn’t want the EPA abolished forever. It’s an Austrian thing.

There’s also an interesting core feature to all of this – the concept of creative destruction – something that appalled Karl Marx. Capitalist economic development arises out of the destruction of some prior economic order – the automobile replaces horses or whatever – and lots of people get hurt very badly. Marx thought folks should be protected from the shock of these inevitable shifts, until they can adjust to the new economy, if they can. Perhaps workers of the world should unite or something. The Austrian School has a totally different view:

The Austrian people see that creative destruction ONLY occurs when improved methods to create the service rendered have appeared on the market, and people of this society prefer these new methods to deliver the service over the old methods. Since the new method of rendering the service is perceived by the people of the society as a superior over the old method, and “creative destruction” is only a consequence of people in society turning to the improved method, “creative destruction” is in reality and seen from the broader picture, part of the movement of society reaching a higher level of wealth.

In short, some people lose, big time, but that doesn’t matter in the long run. It’s not even sad. Forget them.

This is Social Darwinism applied to economics. Some species will die off, because they should. Destruction is progress, and now, if you listen to the voices on the right, freedom. A planned economy is not free, and a planned economy will die, because it cannot evolve.

The argument is not new, as Paul Krugman explained two years ago:

“Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate” – that, according to Herbert Hoover, was the advice he received from Andrew Mellon, the Treasury secretary, as America plunged into depression. To be fair, there’s some question about whether Mellon actually said that; all we have is Hoover’s version, written many years later.

But one thing is clear: Mellon-style liquidationism is now the official doctrine of the GOP.

Two weeks ago, Republican staff at the Congressional Joint Economic Committee released a report, “Spend Less, Owe Less, Grow the Economy,” that argued that slashing government spending and employment in the face of a deeply depressed economy would actually create jobs. …

Here’s the report’s explanation of how layoffs would create jobs: “A smaller government work force increases the available supply of educated, skilled workers for private firms, thus lowering labor costs.” Dropping the euphemisms, what this says is that by increasing unemployment, particularly of “educated, skilled workers” – in case you’re wondering, that mainly means schoolteachers – we can drive down wages, which would encourage hiring.

There is, if you think about it, an immediate logical problem here: Republicans are saying that job destruction leads to lower wages, which leads to job creation. But won’t this job creation lead to higher wages, which leads to job destruction, which leads to…? I need some aspirin.

Krugman is not Austrian, thus he needs that aspirin, but he’s too specific. Mellon-style liquidationism does seem to be the official doctrine on the other side now, although it’s most often called austerity economics, but the larger problem is being enamored by the concept of creative destruction. There are those who said we never should have bailed out the financial system back in 2008 with that TARP thing – let our economy, and the world’s, collapse in chaos. Let it all freeze-up and die. What will come next will be far better, even if that means there will be five generations of misery for almost everyone everywhere. Let things play out without any intervention. That’s also what freedom is all about after all.

There’s a certain cold logic to that position, with the emphasis on cold. We’ve spent the decades since Hoover left office dealing with the logic, trying to figure out what should be left alone and what should be regulated, and another economist, Robert Reich, has this to say about that dispute:

One of the most deceptive ideas continuously sounded by the Right (and its fathomless think tanks and media outlets) is that the “free market” is natural and inevitable, existing outside and beyond government. So whatever inequality or insecurity it generates is beyond our control. And whatever ways we might seek to reduce inequality or insecurity – to make the economy work for us – are unwarranted constraints on the market’s freedom, and will inevitably go wrong.

By this view, if some people aren’t paid enough to live on, the market has determined they aren’t worth enough. If others rake in billions, they must be worth it. If millions of Americans remain unemployed or their paychecks are shrinking or they work two or three part-time jobs with no idea what they’ll earn next month or next week, that’s too bad; it’s just the outcome of the market.

According to this logic, government shouldn’t intrude through minimum wages, high taxes on top earners, public spending to get people back to work, regulations on business, or anything else, because the “free market” knows best.

This is just not so:

In reality, the “free market” is a bunch of rules about (1) what can be owned and traded (the genome? slaves? nuclear materials? babies? votes?); (2) on what terms (equal access to the internet? the right to organize unions? corporate monopolies? the length of patent protections?); (3) under what conditions (poisonous drugs? unsafe foods? deceptive Ponzi schemes? uninsured derivatives? dangerous workplaces?) and (4) what’s private and what’s public (police? roads? clean air and clean water? healthcare? good schools? parks and playgrounds?); (5) how to pay for what (taxes, user fees, individual pricing?). And so on.

These rules don’t exist in nature; they are human creations. Governments don’t “intrude” on free markets; governments organize and maintain them. Markets aren’t “free” of rules; the rules define them.

The interesting question is what the rules should seek to achieve.

There’s much more, but it comes down to this:

If we want to reduce the savage inequalities and insecurities that are now undermining our economy and democracy, we shouldn’t be deterred by the myth of the “free market.” We can make the economy work for us, rather than the other way around.

If he’s right, that there is no such thing as a free market and never was, maybe creative destruction isn’t always inevitable either. New economic orders will arise, but the inequalities and insecurities that follow may not have to follow. We can take control. There’s no point in getting slapped silly by Adam Smith’s famous Invisible Hand. One can duck, or slap back.

The current way to slap back seems to be the Affordable Care Act, Obamacare. Sure, insurance companies should be free to make money any way they want – refuse to insure bad risks, like those with preexisting conditions, refuse to pay claims they consider outrageous, charge high rates for certain folks who live in the wrong place or who are the wrong age or who are too dumb to realize they’re being fleeced. It’s a free country, unless you don’t want to live in a country where folks are dying in the streets and diseases spread like wildfire. We pay a price when forty million folks have no way to access any healthcare, save for emergency rooms, when it’s too late. A free market does lead to creative destruction, but these folks don’t really have to get sick and die, for a better world, later, where everyone, surviving, is healthy. These folks don’t have to be liquidated, as Andrew Mellon might suggest were he still around.

The problem is that we have a party that really does believe in the concept of creative destruction, and now the methodology itself. When you begin to believe that destruction is creation you’re in trouble, and Obama just addressed this:

In a speech Monday about the financial crisis, President Barack Obama tore into Republicans on Tuesday for their persistence in trying to destroy Obamacare, reminding them that Mitt Romney lost the election.

“It passed both houses of Congress. The Supreme Court ruled it constitutional. It was an issue in last year’s election and the candidate who called for repeal lost,” he said to applause. “Republicans in the House have tried to repeal or sabotage it about 40 times. They’ve failed every time.”

He went after Republicans for suggesting they might risk a government shutdown or debt default if Obama refuses to defund or delay the implementation Obamacare.

“Some Republicans in the House of Representatives who are promising to shut down the government at the end of this month if they can’t shut down the Affordable Care Act,” he said. “And if that scheme doesn’t work, some have suggested they won’t pay the very bills Congress has already run up.”

“Are they really willing to hurt people just to score political points? I hope not.”

They are – because they’ve become enamored of the concept of destruction itself. It’s almost as if it floats free of anything else. Destruction good! Grunt.

The conservative editorial page of the Wall Street Journal called on Republican “backbenchers” in the House of Representatives to abandon this nonsense about defunding or delaying Obamacare. Obama will not sign a continuing resolution that guts his signature legislative achievement, even if leaders of the defunding movement like Ted Cruz and Heritage Foundation president Jim DeMint have assured their supporters that they aren’t chasing an absurd goal. That really is raising the risk of a government shutdown, and the Journal has to explain the dim likelihood that Obama would ever sign such a bill:

Their demand is that the House pair the “must pass” continuing resolution or the debt limit with defunding the health-care bill. Kamikaze missions rarely turn out well, least of all for the pilots.

The problem is that Mr. Obama is never, ever going to unwind his signature legacy project of national health care. Ideology aside, it would end his Presidency politically. And if Republicans insist that any spending bill must defund ObamaCare, then a showdown is inevitable that shuts down much of the government. Republicans will claim that Democrats are the ones shutting it down to preserve ObamaCare. Voters may see it differently given the media’s liberal sympathies and because the repeal-or-bust crowd provoked the confrontation.

When you’ve lost Rupert Murdoch’s Wall Street Journal you’ve lost it all:

We’ve often supported backbenchers who want to push GOP leaders in a better policy direction, most recently on the farm bill. But it’s something else entirely to sabotage any plan with a chance of succeeding and pretend to have “leverage” that exists only in the world of townhall applause lines and fundraising letters.

In short, this is not creative destruction. It’s just destruction. People will notice, and the whole thing is very strange:

Republicans like the 2010 health care law better when it’s called by its proper name – the Affordable Care Act – instead of Obamacare, according to a new Fox News poll.

Republican support for the law jumped eight percent, from 14 percent for Obamacare to 22 percent for the Affordable Care Act, when pollsters revised the question’s language.

Overall support increased from 34 percent to 39 percent with the change. Democratic support moved one percent; independent support rose four percent.

Their opposition makes less and less logical sense every day, but then there was this:

In what would be a dramatic change of course, House Republican leaders are considering a strategy of risking a government shutdown at the end of this month if Obamacare isn’t defunded.

In the weekly conference meeting Wednesday morning, GOP leaders intend to propose a continuing resolution to keep the federal funded beyond Sept. 30 but strip out funding for Obamacare. The move was first reported by the conservative National Review.

Senior Republicans know the strategy is a nonstarter in the Democratic-led Senate, and for months have wanted to avoid a shutdown confrontation over Obamacare. The latest move is a tacit admission from leaders that they have, for the moment at least, been defeated by conservatives who are eager to eliminate the health care law at all costs. When the House bill fails in the Senate, as it is certain to do, House GOP leaders would then try to pass a “clean” continuing resolution that funds the government but leaves Obamacare alone. The prospects of a clean stopgap bill winning over most House Republicans are also remote.

We will get a shutdown, for no good reason, and maybe the debt-limit will not be raised, collapsing the worldwide economy as, for the first time, America refuses to pay its bills. Fall in love with destruction, for destruction’s sake, and such things happen, but there’s nothing creative about it, although Salon’s Brian Beutler suggests that House Speaker John Boehner may be getting creative here:

There’s one, and only one reason Boehner would invite a shutdown, and it’s actually a good one. I’d even argue it’s something the Obama administration and Senate Democrats should have courted earlier in his speakership, or even in the spring this year. But the fiscal calendar facing the country right now is unique, and makes the proposition exceptionally dangerous.

Whether you’re Boehner or Harry Reid or President Obama, the argument for allowing a shutdown looks about the same. It’s perhaps the only way to persuade monomaniacal House Republicans that there’s a difference between negotiation and extortion — that if their extreme demands touch off a visible crisis like a government shutdown, everyone will know who’s at fault. That’d be great for Democrats for obvious reasons.

For Boehner, forcing a shutdown would be akin to spiking an addict’s stash in the hope of hastening rock bottom – a novel but extremely risky strategy when all other attempts at intervention have failed.

There are risks, but it might be worth it:

One possible hazard is that conservative House members have become so radicalized in the Obama era, and their districts so right-wing, that they’re inured from the political consequences of a shutdown in a way that Newt Gingrich’s members weren’t. Some of them likely are. But others will take notice when Obamacare implementation continues unabated, services are interrupted, and their constituents get angry.

Then and only then, the thinking goes, Boehner’s members will stop behaving like extremists, and he’ll stop having to kowtow to them.

It’s a theory, and plausible, but it is also plausible that the whole crew decided, finally, that they just like destruction, for the sake of destruction. It doesn’t have to be creative. It can be fairly random. They might even destroy themselves. It’s all good.

Andrew Sullivan puts it this way:

There’s absolutely a role for an aggressive opposition to any large new initiative like this. At the same time, we live in a constitutional system which requires adherence to some simple norms. The first is that a general election, especially when an issue is front-and-center in it, should count. Two general elections should count as well. Obama has been elected and re-elected on a specific pledge to bring both cost discipline to the healthcare sector (now hugely more inefficient compared with others in the world) and to expand coverage to as close to universal as is feasible. The legislative maneuvering for it was messy; and the roll-out of such a plan is bound to have glitches and surprises.

The opposition could use weaknesses in the law to propose fixes; it could urge for a more radical severing of employment with insurance; it could fight for more effective and competitive health care exchanges; it should keep an eagle eye on cost over-runs. But if it only controls the House, it should not stop already-passed legislation from being implemented out of partisan spite or ideological zeal. It should not threaten the very functioning of all government or a credit crisis to stop something that cannot – and should not – be constitutionally stopped. That’s not opposition; it’s sabotage – especially the campaign to get young people not to opt in. It is a form of nihilist vandalism…

Nihilist vandalism is not creative destruction. Somehow they confused the two, and Jonathan Chait wonders what happens if Obamacare works out:

It is hard to imagine that the news about Obamacare over the next few months will be good. The rollout of Medicare and the addition of prescription-drug coverage under George W. Bush both provoked mass confusion and complaint, and those laws were not fighting off an angry rearguard insurgency. The question is whether the glitches and failures amount, in either reality or perception, to the sort of catastrophic failure that leads panicked insurance companies, potential customers, governors, and state legislatures to pull out.

Conservatives have portrayed their war against the exchanges as a desperate last stand against Obamacare and for freedom as we know it. History is replete with previous examples of last stands. Ronald Reagan warned conservatives in 1961 that if Medicare passed into law, “one of these days you and I are going to spend our sunset years telling our children and our children’s children what it once was like in America when men were free.” The conservative movement sustains itself by constantly disregarding its warnings of the last mortal threat to liberty and redirecting itself onto the next one. Yet it has made opposition to Obamacare completely central to its identity. If the Obamacare train does not wreck – or, to put it more accurately, if conservatives fail to wreck the train – it will be fascinating to see: What will they do next?

Maybe they’ll find something else to destroy, for the fun of it, or for freedom, or something, but Paul Waldman sees this as over:

Come January, the ACA will be transformed. It will no longer be a big, abstract entity that would be possible to undo. Instead, it will be what it truly was all along: a large number of specific reforms and regulations that in practical terms are entirely separate from one another. What this means is that once it takes effect, “Obamacare” for all intents and purposes will cease to exist.

Sullivan adds this:

It’s always easier to oppose an abstraction than a reality. We saw that with marriage equality. Maybe the opposition to Obamacare will fade away as fast as opposition to gay equality. Because it is based on the same ignorance, panic and fear.

There’s something to that – many conservatives are fine with the Affordable Care Act after all, not Obamacare – but the problem is more than getting all wrapped up in the abstraction of Obamacare. There’s that old Rogers and Hart tune with the refrain about how falling in love with love is falling for make-believe. The concept isn’t the thing itself. It’s worse when you fall in love with destruction.


About Alan

The editor is a former systems manager for a large California-based HMO, and a former senior systems manager for Northrop, Hughes-Raytheon, Computer Sciences Corporation, Perot Systems and other such organizations. One position was managing the financial and payroll systems for a large hospital chain. And somewhere in there was a two-year stint in Canada running the systems shop at a General Motors locomotive factory - in London, Ontario. That explains Canadian matters scattered through these pages. Otherwise, think large-scale HR, payroll, financial and manufacturing systems. A résumé is available if you wish. The editor has a graduate degree in Eighteenth-Century British Literature from Duke University where he was a National Woodrow Wilson Fellow, and taught English and music in upstate New York in the seventies, and then in the early eighties moved to California and left teaching. The editor currently resides in Hollywood California, a block north of the Sunset Strip.
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One Response to Embracing Theoretically Creative Destruction

  1. Rick says:

    That poll by Fox News gives me an idea. Maybe Obama can offer a compromise on health care that the Republican “backbenchers” might agree to:

    He can (1) repeal “Obamacare”, whatever the hell that is, and (2) just replace it with this much-more-palatable “Affordable Care Act”, which has the advantage of having already been passed into law by Congress, plus the ACA program seems to be more acceptable to everybody on both sides than that “Obamacare” thing.

    And as for those arguments in favor of not raising the debt limit:

    You could argue to these people that, first, they went out and had an expensive dinner and paid for it with a credit card, but then when they got the credit card bill, they refused to pay it — on the grounds that, what, they were on a diet and shouldn’t have eaten that much?

    But then the congressperson says, no, it wasn’t me who ordered and ate that dinner in the first place, it was those other congresspeople. To which you respond, okay, but you were outvoted by those other congresspeople, the ones who voted to buy that dinner, and you are now trying to welsh on that promise to pay the debt. In essence, even though you didn’t have the votes to not spend the money in the first place, you’re trying to make up for that after-the-fact, resorting to extortion, rather than votes, which seems to be the way the Constitution recommends we govern.

    And the other side, of course,will probably just ignore you.

    And finally, an answer to an age-old question: What makes some people think you can grow the economy by cutting it?

    I’d never heard that explanation via Paul Krugman on why Republicans believe (or at least did two years ago) that slashing government spending and jobs would actually create jobs:

    “A smaller government work force increases the available supply of educated, skilled workers for private firms, thus lowering labor costs.”

    So the idea, I guess, is that there’s a labor shortage in the private sector which is being caused by government paying its workers too much money? And so the only way for those people to get decent, private sector jobs is to fire them from the public sector? That is stunning! I wonder if they had any data to back up that theory.

    In other words, say we have a shortage of doctors (and we know there is one because we know most doctors are grossly overpaid), and so the way to not only meet the economy’s demand for more doctors, but also to bring down doctor’s exorbitant pay, is to lay off some kindergarten teachers and firefighters, forcing them to go out and look for new jobs as brain surgeons?

    Yeah, yeah, that’s the ticket.


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