The “bailout state”

The period of industrial boom in Europe gave rise to the welfare state. Its purpose was to extend social assistance to the many who were adversely affected by industrialization. Today’s global financial crisis, in contrast, has given us the “bailout state,” the corporate elite’s version of the welfare state.  Its purpose is to extend financial assistance to the few who most benefited from the financial boom, but are now facing the price of their recklessness and greed.

The great debate in the world’s biggest economies is no longer whether, but how, to prevent the collapse of companies threatened by insolvency and liquidity problems.  Most of these are gigantic investment banks that took savings from people all over the world. Because their reach is global, the fallout from their implosion will also be global.  Others are iconic firms like the major American car companies on whose continued operation at least three million US jobs depend.  The consequences of their failure are no less systemic and global.

Bailout is the only answer governments can imagine at this point. Due to the size of these ailing companies, their rescue by the private sector seems almost out of the question. Thus the state sees no choice but to give them the money they need to keep their operations going.  A crucial question has cropped up however: Should the money be given as bailout or as buy-in?  Should the government lend money or should it buy equity in these companies? On this issue hinges the more basic question: To what extent can the political system control decisions and outcomes in the modern complex economies of today’s world?  What new problems can arise when the political system takes upon itself functions previously dispersed across the myriad decision-making points of the modern economy?

Here we are dealing with the contested boundaries of politics and the economy.  The theory that can illuminate the options and possible outcomes is far from settled.  That is why at the concrete policy level, the debate rages.  At the US Congress the other day, President Barack Obama deployed his charm to get bipartisan support for his $819 Billion economic stimulus package.  The measure eventually passed but without a single Republican congressman voting for it. Obama aims to stimulate economic activity by injecting public money into infrastructure, educational facilities, and environment-friendly technologies.  The Republicans prefer the simpler mechanism of tax cuts over outright capital infusion.  Aware that there are no neutral standards by which to determine which is better, Obama ended his fruitless consultation by telling them, lest they had forgotten, that it was he who won the elections.  Uttered in jest, the message was clear — this is ultimately a political decision.

This area of inquiry may be under-theorized, but it does not mean it has not been problematized.  One writer who spent a lot of time sorting out the tangled lines between politics and the economy was the German social systems theorist, Niklas Luhmann.  His reflections on the dilemmas of the welfare state offer us insights into the dim prospects that await the bailout state.

Luhmann argues that modern society is unique in that it solves its complex problems not by resorting to vertical hierarchies of decision making but by parceling out complexity across horizontally differentiated function systems.  Hierarchy belongs to traditional society, whereas functional differentiation is the mark of modern society.  Functional differentiation may be seen in the emergence of autonomous function systems like politics, the economy, law, science, religion, the mass media, education, etc.  The operations and performances of each become the environment for the rest.  No single function system – not even the state – controls or commands the others.  That’s how modern society works.

In the welfare society, the state does not limit itself to defining policy and providing the laws and the money to shape the parameters of economic activity.  Rather, in the effort to control outcomes at every level, it finds itself taking over decision-making functions that can only be performed at the price of over-bureaucratization.  The problems encountered are very similar to those in socialism where functions are collapsed and folded into the state in order to effect social distribution.

But, more than this, Luhmann warns, when governments politicize decision-making in the economy, they unwittingly assume for themselves – in the public eye – responsibility for the minutest changes that occur.  Where these changes produce disadvantages for some sectors, their association with government only heightens the reasons to resist them.

Viewed against the background of the populist hopes that attended Barack Obama’s rise to the US presidency, the economic stimulus package he is pushing is bound to injure him politically.  Homeowners seek direct rescue from the mortgage traps into which they had been led.  Hard-working Americans demand guarantees for their retirement savings now presently caught in the web of a financial world they barely understand.  There is, on top of all these, the even more pressing need to stop the further hemorrhaging of jobs. The expectations are many and come from all directions, but the legal and financial instruments at the disposal of the state to balance and satisfy these interests are extremely limited.  Without far-reaching social change, the bailout state promises to be a dead end not only for Obama but for America.

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