Are We All French Now?

Will George W Bush by remembered as the president who closed the Age of laissez-faire philosophy when he effectively nationalized the banking and mortgage industries? Oh the irony would just kill me.

What is a certain is that idea of Big Government is in the air, and even the “S” word is not necessarily (just) an insult any more that you might be a traitor to the Republic.

This week, there was yet another daring article by Newsweek called provokingly “We are all socialists now”, comparing recent economic policies in the US to French socialism. Of course, we’re not there yet but beyond their easy association of France to berets and croissants, their analysis is interesting both in the short and long run. No doubt that, as we have seen this week, the classic laissez-faire ideology won’t go down without a fight. I am just impressed that the "S" word can now be uttered without the fear that you must be put to jail.

The U.S. government has already—under a conservative Republican administration—effectively nationalized the banking and mortgage industries. That seems a stronger sign of socialism than $50 million for art. Whether we want to admit it or not—and many, especially Congressman Pence and Hannity, do not—the America of 2009 is moving toward a modern European state.

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The story, as always, is complicated. Polls show that Americans don't trust government and still don't want big government. They do, however, want what government delivers, like health care and national defense and, now, protections from banking and housing failure. During the roughly three decades since Reagan made big government the enemy and "liberal" an epithet, government did not shrink. It grew. But the economy grew just as fast, so government as a percentage of GDP remained about the same. Much of that economic growth was real, but for the past five years or so, it has borne a suspicious resemblance to Bernie Madoff's stock fund. Americans have been living high on borrowed money (the savings rate dropped from 7.6 percent in 1992 to less than zero in 2005) while financiers built castles in the air.

Now comes the reckoning. The answer may indeed be more government. In the short run, since neither consumers nor business is likely to do it, the government will have to stimulate the economy. And in the long run, an aging population and global warming and higher energy costs will demand more government taxing and spending. The catch is that more government intrusion in the economy will almost surely limit growth (as it has in Europe, where a big welfare state has caused chronic high unemployment). Growth has always been America's birthright and saving grace.

The Obama administration is caught in a paradox. It must borrow and spend to fix a crisis created by too much borrowing and spending. Having pumped the economy up with a stimulus, the president will have to cut the growth of entitlement spending by holding down health care and retirement costs and still invest in ways that will produce long-term growth. Obama talks of the need for smart government. To get the balance between America and France right, the new president will need all the smarts he can summon.

NOTE : It is also ironic that laissez-faire and Socialism both have French origins.