Why Are We So Afraid of Democracy? Part III
I’m arguing that there are three main reasons why our faith in democracy has taken a hit in recent years. The first reason is the deadlock in Congress that has everybody so frustrated. But as I pointed out, this isn’t a US phenomenon, it’s a global phenomenon. And it’s persisted not because Congresspersons are idiots but because the problems are so intractable, and therefore the US electorate is every bit as divided as Congress. Massive indebtedness has smothered rapid economic growth, and yet rapid growth is the only way we can hope to pay off the debt. Government spending, even on useful projects, only increases the debt burden, making the problem worse. Failure of governments to spend seems to mean we are doomed to 2% (and lower) growth forever.
The second reason we’ve soured on democracy is the example of China, which has tended to convince us that a lumbering, frequently deadlocked democratic system is antiquated and can no longer compete with efficient central autocracies such as China’s. But as I hope I’ve shown, China’s vaunted success looks a lot uglier on close inspection, and its future looks positively dire.
And there is one final reason why we’ve become disenchanted with democracy: the Federal Reserve System of the United States (and the Bank of England and the European Central Bank and the Bank of Japan). These unelected technocrats have usurped the job of democratic institutions throughout the entire democratic west. Post-Financial Crisis, the most important job in the world has been to get the economy moving again and put people back to work, and the technocrats have arrogated that job to themselves.
Here’s how it happened:
At the height of the Financial Crisis, just after Lehman Brothers failed, there was a fear that the global banking system would melt down. It’s certainly true that a failure of the payments and settlement system would have been a grave problem, but was it really likely? Or was this an example of the Parmenides Fallacy(1) at work? But let’s say we didn’t want to take the chance, so the Fed went ahead and “saved” the banking system. Everybody was hugely relieved and hugely impressed and the pointy heads over at the Fed now began to think they were gods.
If you were a god would you sit back and just do your job (keeping interest rates low) and let Congress deal with the economy? Of course you wouldn’t! You would go on global TV and say something like, “I, Mario Draghi, will do whatever it takes to save the world!”
It turns out, to the surprise of no sane person, that the pointy-headed gods actually had no clue how to save the world. But they did have the power – thanks to their unlimited balance sheets – to drive stock prices into the stratosphere, which they promptly did. If you were an affluent, influential person, you naturally owned a lot of stocks and you were naturally delighted by central banker actions. But if you were a struggling working person who didn’t own stocks, you had a very different view of what the pointy-heads were up to.
Our new gods kept interest rates low, but since that didn’t work and since there was a possibility that Congress might horn in on their act, they launched QE. And when that didn’t work, they launched QE2, and when that didn’t work they launched QE3, and when that didn’t work they launched negative interest rates. The stated purpose of all this frantic activity was to help the banks rebuild their self-immolated balance sheets. I.e., if we strengthened the banks and weakened savers, maybe soon the banks would be strong enough to cause another financial crisis.
After eight long years of this hurly-burly, with the global economy still flat on its back, (2) it turned out the real outcome of this pointy-headed busyness was that legislatures all across the western world were undermined and enfeebled.
Democracy, my friends, doesn’t happen by accident. It works only when voters hold their representatives feet to the fire about an issue. But when an issue as crucial as the global economy has been misappropriated by technocrats, democracy fails. The temptation to turn important issues over to “enlightened experts” (like Thomas Friedman’s Chinese leadership) needs to be resisted.
To illustrate this point, let’s concede the nightmare scenario the pointy heads cite to justify their hijack: if the Fed hadn’t acted, the US economy would have collapsed into another depression. Nonsense, of course, but suppose it had happened? Bad as it was, what were the principal outcomes of the ten-year Great Depression in the 1930s? It produced a smashing victory in World War II and it produced America’s Greatest Generation. What have been the principal outcomes of eight years – so far! – of technocratic arrogance? I mean, besides a moribund economy, a huge increase in the U.S. debt load, political gridlock, massive inequality, an outraged working class and Trump/Sanders?
(1) Parmenides was a Greek philosopher who lived just before Socrates and was likely an important influence on him. (There is a – very challenging – Platonic dialogue called “Parmenides.”) The Parmenides Fallacy works like this: A guy (maybe his name is Ben) is running around Washington, D.C. blowing loudly on a trumpet every 30 seconds and annoying the hell out of everybody. A cop grabs him and demands to know what he thinks he’s doing. “I’m keeping the collapse of the global banking system away!” says the guy. “That’s ridiculous,” says the cop. “There’s no banking collapse.” “You see,” says the guy, “it works!”
(2) I recently debated Ben Bernanke about Fed monetary policy since the Financial Crisis. He argued that, at just under 2% annual GDP growth, “the U.S. is the envy of the world.” “That’s like” (I should have said) “being the best defensive tackle on the middle school girls’ football team.”