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Conard and Zakaria on What Ails the Economy

Yes, there are lessons in history. But untangling those lessons, like anticipating the sentiments of voters, is a process that shifts as we attempt to capture it. And so from left and right we end up chasing a kind of essence, an equilibrium, which may not exist.
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In the new Foreign Affairs, Edward Conard and Fareed Zakaria engage in a ritual of ideological shadow boxing. The ostensible subject is an essay Zakaria wrote in the January/February Foreign Affairs called "Can America be Fixed?" in which he laid out the necessity -- and with Zakaria, as with Thomas Friedman, dire necessity always looms -- for a more activist, anti-austerity governmental role in "reforming and investing." Conard, the author of Unintended Consequences: Why Everything You've Been Told About the Economy is Wrong, a former Bain Capital managing director and now a visiting scholar at the American Enterprise Institute, fires back at Zakaria, accusing him of a kind of allegiance to a past that no longer exists, and once again ticking off arguments from his book: less government, more empowered entrepreneurs, unleashed innovation and investment. Zakaria returns fire. In some ways the conflict comes down to this: We have been sick for decades now, and we must tackle the root causes of that illness (Zakaria); or we have been doing quite well, particularly compared to Japan and Europe (he rarely mentions China), until the government screwed up (Conard). Both are right and both are wrong. And that's the problem.

This is an argument conducted in different languages. Both engage in bold declaration of "fact" offered up with granitic certainty. For Zakaria, the economic distress is "a crisis of democracy" that requires a wide range of government remedies: in infrastructure, education, immigration and "fiscal" policies, by which I assume he means how to pay for the safety net. Zakaria lauds massive investments in the '50s and '60s that he believes led to both prosperity and a robust middle class (he doesn't try to explain earlier U.S. growth that came without much government initiative). Like a latter-day Walter Lippmann, he seems to want to save democracy by having a bit less of it. Conard, for his part, thinks anything smacking of a governmental role is a mistake in "today's knowledge-based economy," which has been shaped over the past two decades by "private-sector investment and risk-taking, not infrastructure investment." Conard lauds a free-market system, which he couches in Darwinian terms: "As with biological evolution, the U.S. economy is far too complex for any one individual or organization to understand which investments will succeed and which will fail. Free enterprise picks investments successfully by running millions of experiments, and the survival of a product depends on producing more value per dollar of cost than other products do."

If only life -- even economic life -- were so simple. But it's not. One can favor Zakaria's anti-austerity impulse for a variety of reasons, long and short-term, while still acknowledging that Conard has a point: harkening back to the '50s sends us into a conceptual swamp, wrestling with matters of causation and correlation. (Conard goes on to romanticize the free-market achievements in the U.S. over the past two decades.) The '50s have become a polemical crutch for those who decry the last forty years, which is ironic, given how it's also sniffed at as a decade of stifling, even bureaucratic, conformity. Zakaria is spot on, however, with one argument: government spending, mostly from the military, built the foundation of information technology in the '50s. That's undeniable. It also constructed lots of roads, dams and bridges, which even Conard admits didn't hurt productivity and growth. But that investment occurred in an economy still recovering from depression and war, in hindsight, a combination of over and underinvestment. Wall Street was then a shadow of what it would become. The U.S. was really the only economic power in a world shattered by war. Large corporations dominated the landscape. It was still an industrial age. Unions and lifetime employment predominated. Banks were highly regulated; taxes high; the consumption-based economy was just beginning.

All that has changed. We are different; the economy is different; the world is different. And while there are good anti-recessionary arguments for infrastructure spending, not to say productivity gains from better roads and bridges (financed at rock-bottom interest rates), there's no guarantees. Bridges are easy. But will more money improve education all that much? What about healthcare? Conard is right about the government trying to pick and choose. It rarely works and it creates a political backlash, a la Solyndra. What government can, and should do, is support the economic backbone, from fundamental science and technology to the financial system. If you have to enter the market, buy the products, as the Defense Department did with early semiconductors, not the companies. Spread the wealth, like the old Bell Labs. Regulate sensibly, for the long-term.

But Conard indulges in his own simplistic formulations as well. He falls into the historical trap of believing we can return to a prelapsarian age before, say, a safety net, an imagined age of entrepreneurs and self-reliance. In the end, Conard's vision chills the bones -- and because of it, is unrealistic in a democracy. For example, Conard suggests we need more "information technology experts," despite the fact that "recent college graduates remain unemployed or underemployed." The problem? "Many gifted students have chosen not to seek jobs in information technology because the salaries, despite being in the upper income brackets, are too low to motivate them to pursue these tedious and arduous careers." He knows that? So folks would rather be unemployed than make good money, though perhaps not enough to tackle such an "arduous" career? I seem to have known many IT professionals who have been laid off over the past few decades. Are these folks, not to say recent grads, averse to a slight increase in marginal tax rates in the higher brackets? (The great bulk of IT jobs seem to be middle income.) Moreover, given the "arduousness" of IT, does he believe that all those unemployed have the ability to enter IT? You wouldn't want me working on your computer. Or does he just believe if we throw enough bodies at IT, something good will happen? Mao once tried that with steel mills.

This is a view of humanity as a machine, driven exclusively to maximize income and consisting of interchangeable parts. We are slaves to the market -- IT today, software engineering tomorrow, trading next week -- and exist only for our ability to act as entrepreneurs and generators of innovation and productivity. There is no larger meaning to work. But the human material is more diverse, limited, capacious, and unpredictable than Conard believes. These productivity units also vote, shaping the political economy. At the heart of Conard's vision is a dismissal of financial bubbles as a problem. (Ignoring them does make the last 20 years look better.) Conard has a point here, but a limited one. Bubbles are more complex than the conventional wisdom suggests. Bubbles can force innovation. And bubbles, even in a prudently regulated market economy, will occur. But bubbles are also a sign that markets may not be as efficient and rational as the free-market crowd believes. They can drive innovation; they can also spawn chronic underperformance and political and social distress -- particularly in a country that has turned key parts of the safety net over to the market. They can destroy faith in capitalism, a kind of dynamic Joseph Schumpeter once gloomily foresaw.

This formulaic exchange is part of our problem. For both of these highly intelligent men, history is hardware store, where they can pick and choose their tools. Both believe deeply in their own rationality -- and the ability of rational men like them to understand the world. But both are captive of their own predilections and presuppositions; they share little common ground. Both are very certain -- and that certainty inevitably crashes against the complexity and contingency of an economy embedded in a social and political moment in time. Yes, there are lessons in history. But untangling those lessons, like anticipating the sentiments of voters, is a process that shifts as we attempt to capture it. And so from left and right we end up chasing a kind of essence, an equilibrium, which may not exist.