Meltzer Lecture: "Socialism is Dead, but Social Welfare Lives On"

I appreciate Simone's comment regarding German taxpayers paying for other countries failed welfare systems because it was one of many topics covered tonight in Professor Allan Meltzer's lecture "Socialism is Dead, but Social Welfare Lives On."  Meltzer, a professor from Carnegie Mellon's Tepper School of Business, founder of the Shadow Open Market Committee, and author of A History of the Federal Reserve, a book considered to be one of the most comprehensive histories of the central bank, is an expert on monetary policy and the Federal Reserve. 

Before his lecture, I was fortunate enough to attend a Q&A session with Meltzer where I received a copy of his most recent book, Why Capitalism?  The context of the Q&A, which focused mainly on the Federal Reserve and monetary policy leading up to the 2008 Great Panic, could not have come at a more opportune time as it supplemented what I had learned from David Wessel's In Fed We Trust.  Meltzer would agree with Wessel that Alan Greenspan kept interest rates too low for too long, as he was afraid of deflation.  But quoting Immanuel Kant, "out of timber so crooked as that from which man is made, nothing entirely straight can be carved," Meltzer emphasizes that no human is perfect, and admits that the problems of capitalism stem from human weakness, but human weaknesses are not specific to capitalism.  Meltzer shifts the blame towards government housing policy.  Around 2005, the Housing and Urban Development Agency encouraged the use of "piggyback" mortgages, or mortgages with no initial down payment. Paired with immense political pressure to put people into houses even though they couldn't afford the mortgage, government-sponsored financing agencies like Fannie Mae and Freddie Mac began to buy these subprime loans, thus fueling the housing bubble which inevitably burst in 2008.  Meltzer believes that social welfare systems attempting to redistribute wealth in capitalist market economies ultimately fail, and Fannie Mae and Freddie Mac are one of many examples.  Meltzer would later delve into the other examples of inefficient welfare programs, such as the Weatherization Assistance Program.

During his lecture in Stackhouse, Meltzer focused primarily on the dysfunctions of social welfare programs and how they must be ameliorated in the face of this global economic crisis.  He started off by saying that European countries boasting extensive welfare programs have not surpassed the more market-oriented United States, and are the main cause to the EU crisis.  Greece for example has experienced a longer, deeper, and wider crises than the Great Depression due to a society structured around a costly welfare system.  Like I posted in our first writing assignment, the struggle for these EU countries lies within the dichotomy between stimulus spending and austerity.  Meltzer simplified the concept to "wanting more consumption now vs. receiving more from long run growth."  Essentially, the fiscal burden is so deep, that it cannot be paid for in taxes; rather, more can be paid for by cutting spending in the short run and balancing the budget, which will ultimately allow for lower tax rates in the future.  Meltzer believes that Greece must face the hard reality that it is hard to find a solution that fits everyone's needs, and a cut in living standards is inevitable.  As made apparent by Simone in her blog-post today, Germans do not want to pay for the economic woes of a failed welfare state like Greece.  As Meltzer put it, "German's who retire at the age of 65 do not want to want their hard earned money going to Grecian's who retired ten years prior at the age of 55." 

At the end of his lecture, Meltzer focused on the home-front.  He prefaced his conclusion by proclaiming that no agency should have the power the Fed has given itself.  In the near 100 years since its birth, the Fed has never made clear its "lender of last resort" policy.  That is why, Meltzer argues, that we have nearly $1.8 trillion worth of excess reserves today.  To prevent this from happening in the future, Meltzer believes that the Fed should follow a set-in-stone "lender of last resort" standard.  He supported this claim by referencing that the two periods of the most economic growth in the U.S., the Fed was bound by some sort of rule.  From 1923-1928, it was the gold standard; and from 1985-2003 it was the Taylor Rule.  Looking forward, Meltzer believes we need to separate ourselves from becoming a social welfare state with more regulations, because the social welfare state is prisoner to interest groups, and regulations are set up by lawyers and bureaucrats who know how to circumvent them.  It is an unsustainable path, and there will be no way to end the probable inflation due to the $1.8 trillion worth of excess reserves without a temporary rise in unemployment.  Therefore, Meltzer concluded, "capitalism works best in a stable environment that permits people to achieve their plans.  To achieve the growth and freedom that only capitalism provides, countries must adopt rules that force policymakers to plan for the medium term and prevent inflation."