The Great Recession: What Will You Tell Your Grandchild?

It is the year 2040. You are sitting with your granddaughter. What will you tell her about the early 2010s, when you lost your job?

You will say that we had the Great Recession, and that bad policies played a role. But will you be able to add that we elected politicians who rose to the challenge and forged a new social compact—one with fewer billionaires but more decent jobs, one with less unsustainable welfare but more family and community support for the poor and the elderly?

Could this be our future past?

I think it could be. To make the needed improvements, we must focus on three key concepts: government, economics, and virtue.

The first two dominate the headlines and the larger public discourse. The financial and fiscal crises have forced us to rethink how politics and economics interact. A consensus is finally emerging about the tough choices that Western democracies must make—thank you, Europe!

But getting our economic house in order, though necessary, is not sufficient. In order to achieve a better government, one that keeps within its competency and fiscal means, we have to think hard about the kind of lives we want and ought to live. The moral character of citizens and the possibilities for good government go hand in hand.

The crucial question is whether we can encourage a more responsible citizenry to address many of the social needs that we have hitherto entrusted to government, often with disastrous results. I believe we can, but we will need to remind ourselves of the basics: Economics 101, Political Economy 101, and Ethics 101.

Here is a taste of Economics 101:

The government must not spend more than what it takes in, except in crises. Even then, it must return to the norm within a few years. In general, targeting the size of government at around 20 percent of gross domestic product (GDP) is a reasonable benchmark for efficiency. To approach and maintain that goal, we must address the following issues: entitlements, taxes and regulation on the fiscal side, and central banks on the monetary side.

Western social democracies must reform entitlements, but the public must first be persuaded that there are better ways to structure society with less government regulation and fewer transfers of wealth. We also must simplify the tax code by eliminating loopholes that favor the politically influential and distort incentives for productivity. Another essential step is that we demand of the government what we expect of corporations: an honest assessment of all financial obligations. Regulations should reward good behavior as well as penalize bad behavior wherever the existing market structure does not; it is especially important that businesses bear the costs of their own bad decisions rather than distribute their losses to taxpayers through politically brokered bailouts.

Lastly, central banks must adopt a clear rule, a single mandate of targeting inflation, price level, or nominal-GDP targeting. They must be the lender of last resort but allow institutions to fail, regardless of size, when they have made bad bets.

This is an enormous undertaking, but it is not impossible. It becomes less daunting the more we remember what is at stake: not only immediate material benefits, but the possibility of long-term economic stability.

Now, turning to Political Economy 101:

We must set the record straight about two notions: that only a crisis will force politicians to act, and that politicians who cut spending will be punished. In the last twenty years, Canada, Sweden, and Australia have found politically feasible ways to cut back on entitlement commitments in times that were tough but not dire. Moreover, research suggests that a platform of limited government can win at the ballot box.

Are we going to court entitlement bankruptcy and risk the social unrest that emergency solutions bring? Or will we direct our efforts to long-term security now? People can work harder to meet higher ideals set by strong leaders. More importantly, people are willing to make sacrifices when they see the bigger picture and understand the greater good they are advancing. The question, then, is what sorts of ideals can motivate citizens to trade short-term self-interest for interest in today’s downtrodden and tomorrow’s citizens?

This brings us to Ethics 101:

People’s ethical convictions are most shaped by the institutions of civil society, particularly religion and the family. This suggests an answer to the question of how to promote the ethical foundations of a good society: Let the government make space for private institutions to develop their own practices and promote their associated virtues. Let it encourage virtue by, for instance, enforcing laws that protect children’s innocence, encouraging (or at least not discouraging) family stability, supporting parental rights in education, refusing to sponsor gambling, and so on.

Government can promote virtue in at least three ways. First, it can enforce criminal laws against obvious and gross vices: theft, child pornography, rape, murder, and other clear moral evils. Second, it can avoid well-meaning but counterproductive social policies that end up discouraging virtue. Third, it can let formative private institutions, including businesses, flourish on their own terms.

We know that top-down economic structures foster cronyism, corruption, and abuse of power. But the alternative vision of free markets requires a societal commitment to responsible living, and a government that provides the legal structures necessary for private enterprise and the institutions of civil society to play their indispensable roles. Government cannot be the primary teacher of virtue, but it can and should encourage virtues at the margin and likewise discourage vices, especially by protecting individuals and social institutions—beginning with the marriage-based family—that promote virtue.

Finally, governments should target assistance to the disadvantaged in two ways: first, by shifting responsibility to more local levels, where care can be best administered; and second, by facilitating the good work of private charities. Historically, the initiatives of churches, community organizations, and other non-profits have been models of effective aid, not least because they understand the local realities and people with whom they deal. Moreover, even the most disadvantaged are often capable of contributing to their own betterment, if those caring for them understand their unique abilities and needs and are willing to make demands of them. This approach to assistance is more effective and dignified; it’s not perfect, but it is better than the alternatives.