Issues in International Political Economy: Getting an Education about the Real World
As a result of the recent economic crisis in the United States, economic ideology has shifted from dogmatism to pragmatism. Statements such as private markets are self-correcting or Keynesian economics is dead, while still espoused, have shown themselves bereft of the ability to add insight to current economic policymaking. Instead, current debates, such as focusing on the proper mix of the government and private sector in stimulating the economy, have adapted a more flexible approach to solving the recent economic downturn.
While ideology has become less rigid, it is the unyielding thoughts of the past several decades that have contributed to the current problem. With private financial interests pushing deregulation in the interest of innovation, financial institutions were able to package mortgages into the now-famous derivatives instruments that inflated profits (and compensation) for investment and mortgage banks. However, it was not only the financial industry where these laissez-faire attitudes were deeply entrenched. Speaking before a congressional committee in 2008, former chairman of the Federal Reserve Board Alan Greenspan stated he was shocked that the self-interest of lending institutions did not lead to the protection of shareholder equity. In his own way, this was Greenspan admitting the current crisis has been a lesson for him as well.
Although it has been widely accepted that private companies and institutions promote the national interest by promoting their private interest, recent events have shown the folly of this viewpoint. The current opposition of the Teamsters Union in allowing Mexican trucks to drive cargo into the United States shows how companies protect their interest to the detriment of others. At the same time, the rejection by the U.S. Chamber of Commerce of efforts aimed at reducing and capturing Carbon Dioxide emissions underscores the divide that can develop between the private and national interest. It is these sorts of discrepancies that give the government the duty to protect and advance the national interest, which will often entail a battle for this obligation against narrower private interests. This is what is currently occurring in the U.S. health care debate.
Now the discussion must focus on how the government and Federal Reserve can avoid future financial crises. Forced to act to avoid the collapse of financial institutions that were “too big to fail”, the government now confronts even larger financial institutions due to the consolidation of the industry as a result of the crisis. Similarly, the government must find preventive measures that diminish excessive risk-taking. This will likely entail a backlash from the financial industry, which will argue of the need for innovation. It is important to remember, however, that just as innovation has creative abilities, it also has destructive abilities. Finally, policymakers must recognize the return of Keynesian thinking. Keynes contributed more than any other person to how the recent crisis was handled; in fact, the corrective polices adopted by the Fed and government were Keynesian. Sometimes, as current events have shown, decisive government action is needed in the face of private sector shortcomings.
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