Two conflicting narratives are dueling for the people’s favor trying to influence the direction in which our democracy swings next.
The prevailing narrative — promoted by incumbent politicians, government bureaucrats, finance industry insiders, and the mainstream media — can be summed up by its time-tested theme song: Happy days are here again! Bold action by our leaders, so the story goes, rescued the global financial system from the ravages of the 2007-2008 financial crisis, a meltdown caused by capitalist greed and foolhardy deregulation. The corporate bailouts were absolutely necessary to save bank depositors, defrauded homeowners, and unionized auto workers — and have been repaid to boot, demonstrating their soundness.
Further evidence that the Keynesian medicine of monetary expansion and fiscal stimulus worked is that the stock market is at an all time high, economic growth topped 5 percent last quarter, and unemployment is back down under 6 percent. Banks are sounder than ever thanks to the Dodd-Frank financial reform law, which spawned thousands of pages of new regulations designed to make sure what happened before never happens again. And inflation is so tame that central bankers must drive it higher in order to save us from the deflationary monster. All good citizens need to do is place their trust with the experts who run our economy, then go out and spend, spend, spend to boost aggregate demand.
The opposing narrative, consigned to the realm of conspiracy theorists and libertarian cranks, is that the Keynesian money-printing orgy has merely papered over the latest in a long string of financial industry debacles. Rather than brining lasting prosperity, this has planted the seeds for a subsequent crisis that will be worse than the last, which itself was worse than the one before that, namely the Savings and Loan meltdown of the late 1980s and early 90s. The soaring stock market is not based on growing economic strength but is, rather, a reflection of an unsustainable asset bubble.
This true state of affairs is obscured because government unemployment and GDP statistics have become politically-driven fabrications. And our too-big-to-fail banks remain vulnerable to a collapse in liquidity when the hyper-hypothecation chains supporting the $600 trillion derivatives pyramid snap under the next black swan event.
Even worse, most deeply indebted developed countries are sitting on demographic time bombs as Baby Boomer retirements swell, drawing entitlement payments from an ever smaller workforce of increasingly unemployed and underemployed young people who cannot possibly carry the tax burden required to keep programs like Social Security and Medicare from going bankrupt. And that’s before we even get to the transfer of wealth from the young and healthy to the elderly and sick that is Obamacare.
This is not merely a glass half full/half empty perception gap. These starkly opposing views are based on fundamental differences in the understanding of how economies work — and how one separates fact from propaganda. The debate will not be settled by dueling opinion columns; we will find out which narrative is true and which is a fantasy soon enough.
The question those of us who cleave to the second perspective need to ask is: How can we prepare for the political reaction when the people who bought the return to normalcy story are smacked by the next global economic crisis? Given the fragility and increasing interconnectedness of global financial systems, there are many potential triggers that could set off this next crisis. But, as in any confidence game, once panic ensues things tend to get a lot worse before they get better.
If there’s one thing we can be sure of, it’s that peddlers of the prosperity illusion will point to the usual scapegoats to explain why their narrative crashed along with the stock market. Entrepreneurs who became rich through innovation will be tarred with the same brush as crony capitalists who have been milking taxpayers through their government connections, even as the latter escape consequences thanks to those same friends in high office.
As citizens watch their home values, IRAs, and 401(k)s plunge and a new wave of recession and unemployment ensues, populist demagogues will take to the airwaves demanding action on behalf of the “forgotten man,” while deriding businessmen, innovators, and entrepreneurs — who are the only real source of economic growth — as “malefactors of great wealth.” Before long, the next great call for politicians to “Do Something!” will reach a fever pitch.
It has all happened before, so odds are it will all happen again — unless enough believers of the prosperity illusion finally change their minds and conclude that ill-advised economic interventions by an all-powerful government are the source of our problems, not the solution. Failing that, the cycle will repeat itself, with ever more violent swings, pushing democracy toward a tipping point.
Is Greece in our future? To avoid that fate, believers in free enterprise had better start crafting a compelling counter-narrative that can keep the demagogues at bay. Otherwise this next crisis could be capitalism’s last.
Bill Frezza is a fellow at the Competitive Enterprise Institute and the host of RealClear Radio Hour.
