The Chicago Boys are at it again—this time with Raghuram Rajan’s analysis of the shortcomings of democracy in response to the financial crisis.
Rajan’s view is, first, democracies can’t make the hard choices, in contrast to markets:
Even if inaction (or action oriented towards the longer term) is the best policy, it is not an option for democratically elected politicians, whom voters expect to govern, which inevitably means action with the potential for quick results. A sympathetic press amplifies heart-rending stories of lost jobs and homes, making those counseling against intervention or advocating longer-term fixes appear callous. Democracies are necessarily softhearted, whereas markets are not; government action has expanded to fill the gap.
Second, right now, government is as discredited as the banks:
Today, by contrast, broad segments of the public see the big banks and big government as being run by the same elites who created the crisis, and then spent public money under one guise or another bailing the banks out. Even as bankers are back to reaping enormous bonuses, taxpayers have been left to foot the bill for the economic collapse. Many workers are unemployed and in danger of being evicted from their homes, while no important banker has been put in jail.
Third, the Tea Party movement is keeping government in check:
In the US, this sentiment has fueled the Tea Party, which coalesces around opposition to government expansion (and to elites more generally), even if that expansion is aimed at regulating big banks (presumably because government regulations tend to be shaped by the powerful among the regulated). Movements like the Tea Party have thus tended keep in check those who, after a crisis of the sort that America has had, typically want more government action, including curbing markets and competition.
This is a very strange view of politics and economics in the United States. What Rajan doesn’t get is that (a) the people supported the bailout of the banks because they were told the world would come to an end if they didn’t, (b) the Tea Partiers only oppose the government and not the big banks, and (c) markets were the softhearted entities that encouraged the expansion of finance and the overextension of risk.
In the end, Rajan and the other Chicago Boys are the ones searching “for unprotected scapegoats upon whom public anger can be dissipated”—and, for them, the scapegoat is always the government.