Sunday News

The risks and rewards

As a good liberal, I was supposed to be all a-flutter over President Obama's inauguration last week. And the rhetoric was uplifting: a rousing defense of the social safety net, assertions that gays are citizens, too, and that we'd better do something about climate change, and soon.

I'm sure it all gave your average Fox News pundit heartburn. And that's just pure gravy, right there.

But there's rhetoric and there's reality. I've preferred Obama and the Democrats in general for cultural reasons: I just think they're more in step with where America is now, and where it's going. But as some readers have noted, I've always had conservative economic tendencies. Which means I believe in the moral necessity of the social safety net -- but I do indeed worry about how to pay for it. And I can't discount the risk that in trying to pay for it all, we take more risks than we otherwise should -- because there's no other choice.

The writer Charles Hugh-Smith published a deceptively simple piece on his blog "Of Two Minds" last week that spoke of what he called the "Grand Tradeoff." Central states like the U.S., he wrote, have made expansive promises to their citizens, vowing to ensure economic security for all citizens.

And yet, he wrote, incentivizing safety inevitably leads to less dynamism, less of the economic growth needed to fund these promises in the first place.

Societies like ours, he wrote, have committed to "permanent financial security via guaranteed mortgages, bank deposits, pensions, education and health care, and high growth to pay for it all based on ever-expanding innovation." The problem: "If everyone is promised financial security, a premium is placed on risk avoidance and complicity with the status quo ... which fosters a low-risk, low-innovation, low-growth economy that is incapable of expanding fast enough to fund all the grandiose promises of rock-solid security made to its citizens."

His bottom line is that to achieve that growth, "you must reward risk and innovation and foster a culture that accepts failure and low-intensity disorder as the norm."

The problem is that there's no guarantee the disorder will be "low-intensity." And the term itself puts a sort of academic distance between the idea and how it plays out in reality -- lost jobs and incomes, despair, perhaps hunger, anger, political disruption and maybe, ultimately, violence.

Governments, as a matter of self-preservation, seek to avoid this. As do sensible citizens.

Yet what if Hugh-Smith is correct? This may help explain the financial crisis of 2008, and suggest another may be inevitable. To generate the growth we have required, financial bubbles are necessary. Wall Street must work its alchemy so everyone may have a "secure" retirement, to boost housing prices and trigger the "wealth effect" that gets people spending. Do sober, conservative investments generate the returns that -- say -- your local municipal penion plan requires to fund all its obligations? Or does its promise of security and less individual risk ultimately drive greater systemic risk-taking?

Lastly -- you realize that as a result of all this and more, markets can no longer be permitted to decline. This requires unceasing government intervention in markets from here on out.

How's that going to end, do you think?

Would Mitt Romney have changed this basic dynamic? Dream on. This is the result of decades of political choices, and again, as a "good liberal" I believe many of those choices to have been virtuous. Our problem has been making promises and counting on future growth to allow us to fulfill them. I do think you ought to pay as you go -- I'd cut much of our ceaseless military intervention around the world to better fund the social safety net. (Or as I've said before: Let's spend American money in America on Americans.)

Uplifting as the rhetoric of last week was, stark choices lie ahead. "We are made for this moment," Obama said.

We'd all better hope he's right.

Gil Smart is a Lancaster Newspapers staff writer. Email him at gsmart@lnpnews.com, or phone 291-8817.