The basic story of American economic history is that every crisis has brought an expansion of government. But crises -- along with eras of progressive consensus -- don't just grow the government in familiar ways, measured by dollars spent or the number of pages in federal regulations. Instead, the needs of the moment force government to find entirely new ways to fix problems, improvisations which then live on as tools of policy.
That government should invest in public goods like education and infrastructure that capitalists will never build on their own is an idea as old as the Republic, and even Thomas Jefferson supported spending on "internal improvements." Beginning with the pensions of the Civil War and continuing through the New Deal, government expanded its role as a provider of insurance against old age, illness, and economic misfortune. Government embraced its power to stimulate a dormant economy in the later New Deal era. In the postwar decades, government became comfortable with using its ability to make loans or to guarantee them, broadening access to higher education and homeownership.
In response to the current financial crisis and the latest shift in the political tides, government is stumbling toward two new economic roles -- as a patient investor and private-sector benchmarker -- in which it is shaping capitalism from within.
The first role is that of an investor who can afford to wait for the payoff -- a lender like Warren Buffett who doesn't demand increased profits every quarter. Even during the bull market, patient investors were rare, which meant companies were driven farther and farther out on the edge in order to boast, as Lehman Brothers did, of 55 consecutive profitable quarters before the one in which the house of cards collapsed.
The federal government has taken on hundreds of billions of dollars in securities from financial companies and is weighing a major loan package for the auto industry. As citizens, we will find ourselves owning a huge portfolio of private-sector assets that may or may not be worth more than we're spending. These are not classic public goods, in that the market would never finance them, but risks that the short-sighted investors of the moment were not willing to take. It was a Republican senator, Robert Bennett of Utah, who seemed to understand this at a Dec. 3 hearing on the auto bailout. Listening to General Motors chief executive officer Rick Wagoner explain that his company couldn't merge or collaborate with Chrysler because investors wouldn't pay for it, Bennett objected, "The reason they don't do it is not because it's not a good business decision ... but because it will not attract short-term financing. [But here] you're talking to a potential lender of patient capital in large amounts. Government capital is the most patient capital there is."
As it becomes a part-owner of key components of the private economy, the government will have to exercise its new power as a shareholder. A second emerging role for government is that of benchmark for private-sector competition. Prospect founder Robert Kuttner proposed in October that the government nationalize one major bank in order to set a standard for others. A similar vision is inherent in proposals for universal health care, such as those released by Obama and by Sen. Max Baucus, that involve a generous and efficient public plan against which private insurance companies would compete. In this role, government sets standards for the private sector not primarily by regulation but by using its own efficiency and scale to set a target for for-profit competitors. This would have been unimaginable a few years ago when government was considered plodding and inefficient compared to the daring brains of the private sector. But circumstances change.
In both these new roles, the government is less a regulator of the private economy than a knowing participant, a market actor providing both liquidity and incentives to make markets work for the common good. In both cases there are dangers. There's a thin line between being the patient investor and becoming the "last sucker" who will buy an asset after everyone else has figured out that it's worthless. And it's easy to foresee private insurers pushing sicker and older customers onto the public plan, making it more expensive and unwieldy.
But these dangers can be avoided as long as government embraces these new roles with its eyes open, aware of the risks. Armed with these two new instruments, government has the power to undertake a radical transformation of the economy, one that, like every previous expansion of government, will ultimately save American capitalism.
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