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By Richard A. Posner


The Montréal Review, September 2011


"The Crisis of Capitalist Democracy" by Richard A. Posner (Harvard University Press, 2010) 

A Financial Times Financial Book of the Year, 2010


"The best volume I have read specifically about the financial crisis and its implications is Richard Posner's The Crisis of Capitalist Democracy... Posner's book contains a formidable-looking chart of supply and demand curves, but do not be misled: this is a clear and brilliant exposition of the greatest economic news story for generations."

--Azar Nafisi, The Times


I completed this book on January 5, 2010-almost 21 months ago as I write this brief introduction to it. My main aim was to give readers who might not be experts in the economics and politics of economic disaster an understanding of the depression ("recession" is too mild a term for it, and "Great Recession" is an oxymoron, since a recession is by definition not "great"-if it were, it would be a depression) that engulfed the world in the wake of the financial collapse of September 2008, the immediate trigger of which was the failure of Lehman Brothers. I placed particular emphasis on the ideas of the great English economist John Maynard Keynes that I thought had been neglected (even by his "New Keynesian" successors), on the faltering efforts of the Obama Administration to overcome the economic crisis, and on the seeming inability of our polarized political parties to deal simultaneously with the depression and with the federal deficit that the depression had exacerbated.

Since I wrote, forgetfulness of Keynes has lingered, the depression has lingered, the federal deficit has grown, the economic situation in Europe has worsened with potentially serious adverse consequences for the U.S. economy, and political polarization has increased with the nearing of the 2012 presidential election (and at the same time the election of a third of the members of the Senate and all the members of the House of Representatives). These are parlous times, and American's confidence in both their private and public institutions has been deeply shaken, with unpredictable political and economic consequences.

The essence of Keynes's analysis of the macroeconomy (that is, the economy considered as a whole, as distinct from specific industries) is recognition of its inherent instability, which derives in turn from the uncertainty of the economic environment and, what is closely related, the psychology of consumers and of businessmen. When a shock to the economy occurs, as it did when Lehman Brothers collapsed in September 2008 and the rest of the global financial community seemed about to follow suit, consumers and businessmen become uncertain about the future. Human beings' natural reaction to uncertainty is to freeze, in the hope that as the uncertainty dissipates and the future becomes knowable, it will be safer to spend, whether on consumer goods, in the case of consumers), or on inputs into production (capital and labor), in the case of businesses. But the immediate effect of the freeze will be to reduce both consumption and business investment; as these drop, firms' incomes will fall, and firms will begin laying off workers and postponing purchases of capital. These moves in turn will reduce incomes, which in turn will reduce consumption spending, and the economy will be in a downward spiral. Eventually, as durable goods, both consumption and production, begin to wear out, consumers and businesses will of necessity begin to save less and spend more, and the downward spiral will start to reverse.

Because the bursting of the housing bubble reduced household wealth enormously, the turn from consumption to saving was bound to be especially sharp and persistent. Remedial measures were called for. As money piled up in corporate bank accounts because businesses were not investing, and in personal accounts because people were saving more (and in the safest possible forms, so that their savings didn't translate into cheap money for business investment) rather than spending, the government had an opportunity, as Keynes had argued in the 1930s, to try to arrest the downward economic spiral by borrowing money from the private sector and using the borrowed money to finance projects, such as highway construction and repair, that would require the rehiring of laid off workers (unemployment in construction was particularly high). The resulting reduction in unemployment would increase consumer incomes and also generate a sense of confidence and optimism, which would spur spending on both consumption and investment goods. The government attempted such a stimulus, to the tune of more than $800 billion, in February 2009. But the program was oversold (the Administration predicted that it would hold unemployment below 8 percent), poorly designed, sluggishly executed, and very poorly explained to the American people. As a result, the very idea of a stimulus became discredited.

The borrowing required for the stimulus increased the federal deficit, which was already growing because of the reduced federal tax revenues in a depression and increased federal spending on safety-net programs such as unemployment insurance-and it was growing from a high level because of the improvident Bush tax cuts. As a result of growing public concern with the deficit, the Administration became caught in a cross-current: pressure for renewed stimulus to dig the economy out of its current hole collided with pressure for cutting the deficit to avoid the economy's falling into a future hole that might be as deep. The pressure to reduce the deficit was increased by the widespread (and almost certainly correct) belief that the Obama health care reform, by adding some 30 million people to the Medicaid rolls, would substantially increase not only the federal deficit, as would other programs undertaken or proposed by the Obama Administration, but also the costs of small business, which is the principal source of jobs. The expected but uncertain increase in those costs, coupled with uncertainty about the effects of the ambitious Dodd-Frank reform of financial regulation, created just the kind of uncertainty that impedes recovery from a depression.

This tension between deficit spending for short-term relief and deficit cutting for long-term relief was just beginning to build in 2009 (remember that my book was completed at the beginning of 2010), though it was sufficiently visible to engage my attention; I particularly emphasized (in the last chapter of the book) the potential consequences of the growing deficit for the economic and political standing of the United States in the world. In the twenty-one months since then, the tension has grown beyond anything I envisioned.

This is mainly because the recovery of the economy has been much slower than expected, and indeed may have stopped. As a result, the deficit is larger than expected and the need for short-term relief even more acute, exacerbating the tension between short- and long-term measures to stabilize the U.S. economy.

But the tension has been further exacerbated by the deterioration of our political culture, which is driving our two political parties apart. I was aware of this but did not foresee that the routine matter of raising the ceiling on the amount of debt that the federal government can hold, whenever the debt is about to reach the existing ceiling, would generate such bitter, indeed poisonous, clashes between the two parties, or that, while it is obvious that dealing with the long-term deficit problem will require a combination of tax increases and spending cuts, the Republicans would dig in their heels against any tax increases and the Democrats' proposed spending cuts would lack credibility.

My book will soon be two years old. But I don't think it has dated. What has happened since it was published is more of the same: more depression, more federal deficit, more political stalemate, more retreat from stimulus, more doubts about the Administration's handling of the crisis. The book's underlying analysis, both of the causes of the depression, the short- and long-term consequences, and the obstacles to overcoming them, remains, I believe, valid.


Richard A. Posner is Circuit Judge, the United States Court of Appeals for the Seventh Circuit, and a senior lecturer at the University of Chicago Law School.


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