In fact the downturn has only reinforced the views of mainstream economists about how wealth and jobs are created. As economist William Easterly has written,54 much of that consensus55 can be summed up as follows:
Free trade does create opportunities for firms and workers doing what they do best. The government can’t forever spend money it doesn’t have. Competitive markets reward innovation and efficiency and punish customer-abusing would-be monopolies. Rapid deregulation has its risks, which we have learned that financial regulators should manage carefully, but too much regulation is far worse.
A group of leading economists from across the ideological spectrum signed on to a statement underlining these important principles just before the 2009 World Economic Forum in Davos. Far from decrying deregulation, the signatories were much more worried that those countries that had not deregulated enough before the downturn would see the current circumstances as a reason to retreat. While recognizing that some modest regulatory tightening might be required, they wrote:
Many countries in the midst of this deregulation backlash are starting from positions of already very high levels of bureaucracy, countries which furthermore have a tradition of strong government intervention. There is thus a danger that over-regulated economies may be about to become even more regulated. (This was one of the very damaging follow-on effects of the Great Depression—a closing off by many countries to international trade.)56
Finally, it is unclear what alternative model is being suggested to take the place of open markets, free trade, private initiative, and accountability under the rule of law. Even governments being forced by circumstances to take over failing banks in Western countries are assuring voters and investors that they will get rid of them as soon as possible. Canada, which followed with some modest enthusiasm the deregulatory fashion of the last decade, has weathered the current downturn much better than most. Russia and China, both with heavy government involvement in the economy, have been battered by the downturn. Many European banks, often held up as bulwarks of solidity and stolidity, and backed by conservative regulation, were much more heavily leveraged (i.e., carried a lot more debt relative to equity) than their American counterparts, who are singled out as the villains of the piece.
Nor is the downturn itself proof that governments need to have large powers to step in and direct the economy to avoid such crises in the future. Taylor shows in fact the opposite. It was only when governments and central banks tamed their temptation to intervene arbitrarily in markets in the early eighties that was unleashed what economists call the Great Moderation. Essentially by applying the Taylor Rule to monetary policy, an era of great stability was ushered in. “Only two recessions occurred in the 25 years from the end of the 1981–82 recessions in the United States until 2007, and those two recessions were very short and mild by historical standards.... The improvements did not occur only in the United States; similar improvements were seen in other developed countries around the world.”57 It was only when governments and central banks began to lose their bearings and abandoned discipline and clarity in monetary policy in particular that the economy went off the rails. That hardly justifies giving governments more such power in the future; rather it is a further argument for limiting their power to do harm by binding them to rules that limit their arbitrary discretion and create certainty for workers, employers, and investors.
Like it or not, this is no crisis of capitalism, the downturn has not proven the moral or financial bankruptcy of markets, and no serious proposal is on the table by any important government that would do anything but tinker with the regulatory framework for capitalism that has been established in the last half century. What this latest downturn has proven yet again is that liberal capitalism is the worst of all possible economic systems—except for all the others.
True, the United States has probably been wounded more than many economies through the combined efforts of bankers and politicians. Furthermore, the downturn coincides with the arrival in office of a Democratic president and Congress who seem determined to raise taxes, expand health care coverage, tackle the entitlement mess in social security, and run multi-trillion-dollar deficits to finance these changes and pay for huge stimulus and bailout packages. All of this is going to be painful. But Americans are a resourceful, irrepressible, and inventive people who have seen worse and always triumphed over adversity. I see no reason to think this time will be any different. The question is not if America will rise again from its economic difficulties, but when, and how much damage will be done by poor policy in the meantime to its economy, the greatest wealth-generating machine the world has ever seen.
2
Our Forgotten Political Tradition Vindicated
Some people are your relatives but others are your ancestors, and you choose the ones you want to have as ancestors. You create yourself out of those values.
RALPH ELLISON, TIME MAGAZINE
The founders of Canada had high hopes for us. They thought that Canada was a land of great promise for the generations to come, as when Sir Wilfrid Laurier so famously proclaimed that the twentieth century would belong to Canada. This was no mere rhetoric, for Canada was a society characterized by tremendous dynamism. We (i.e., metropolitan and colonial Britain together) built the Canadian Pacific Railway (CPR) , a project almost unimaginably huge at the time. We built political institutions to govern a vast and sparsely populated territory. We performed feats of military prowess far greater than our small size might have led one to expect. And we attracted vast numbers of newcomers, hosting one of the largest inflows of people relative to our local population ever seen in history. Living in the shadow of America, where everything is done on a grand scale, makes it hard sometimes to recall that, relatively speaking, we had no reason to be ashamed of what we accomplished in our half of North America and much reason to be proud.
But proud as our forebears were of the country that they were building, they were very much of the view that its success was not an accident. On the contrary, they believed that Canada and Canadians succeeded as they did because they had been endowed by history and Providence with a very specific set of institutions and behaviours. Our success was bound up with our character, and our character was formed by the right kind of experiences. We could welcome people from all over the world and we could populate this huge and sometimes stern piece of geography and make it all work because of the kind of people we were and the kind of people newcomers were expected to become.
Central to this view of the character of Canadians and their institutions was a notion of individual freedom and responsibility, a belief that each of us was endowed with a nature that required us to be responsible and accountable for our choices. The corollary was that if we deprived men and women of their freedom and responsibility for themselves, we prevented people from being fully free and fully human. Dependence on the government or on charity was therefore to be abhorred, not chiefly because of the cost it imposed on those who paid, but because of the damage it did to those who “benefited.”
Our forefathers thought that human beings create themselves largely through their work. And just as our character is shaped by having to earn our way in the world, a different kind of character is formed when we make our way living off the efforts of others.
This is relevant to the story of what we have lost because out of our fear of Quebec separatism and out of our efforts to find something, anything, for our burgeoning labour force to do grew vast social institutions to give people the illusion of working or at least of not being unemployed. We tolerated an unemployment insurance program that paid large numbers of people not to work. We celebrated the emergence of schools and universities that provided a heavily subsidized, mediocre education but kept huge numbers of young people out of the workforce for a few more years. We pushed people into retirement as fast as we could. We enriched welfare to the point that, in the mid-1990s, over 12 per cent of the population of our then wealthiest province,
