The Democrats and the Shock Doctrine

Naomi Klein put forward the thesis that free market/neo-conservative policies come about as a result of politicians using a crisis to push them through, she calls this doctrine the Shock Doctrine. Part of where Klein goes off the rails is in her insistance on equating free market policies and Milton Friedman with neo-conservative policies. A bigger problem though is that Klein just doesn’t seem to understand how government works. Government usually expands both in terms of size and scope of powers during a time of crisis not contract as you would see with free market policies. Take for example the following views expressed by Rahm Emmanuel,

RAHM Emanuel in an earlier incarnation might have helped inspire The West Wing, but in his new role as Barack Obama’s chief of staff, I like the way he puts the challenge of taking over a country that is crashing into recession.

“You never want a serious crisis to go to waste,” Emanuel declared last week.

“It’s an opportunity to do things you could not do before. If there’s a silver lining, it is: you can do big, bold things — throw long and deep.

“This is an opportunity for things that used to be long-term problems — health care, tax, energy, education, financial regulation — things that had been postponed for too long are now immediate, and must be dealt with. It’s not an argument for bigger government, or smaller government, but for more effective government.”

That is classic Shock Doctrine thinking…but is Emmanuel a neo-con? No. Is he a free market type? No. But he is more than willing to use a crisis to expand both the size and scope of power that the government has.

Paul Krugman basically makes the same point and praises Emmanuel for stating the point in public.

But Barack Obama should learn from F.D.R.’s failures as well as from his achievements: the truth is that the New Deal wasn’t as successful in the short run as it was in the long run. And the reason for F.D.R.’s limited short-run success, which almost undid his whole program, was the fact that his economic policies were too cautious.

About the New Deal’s long-run achievements: the institutions F.D.R. built have proved both durable and essential. Indeed, those institutions remain the bedrock of our nation’s economic stability. Imagine how much worse the financial crisis would be if the New Deal hadn’t insured most bank deposits. Imagine how insecure older Americans would feel right now if Republicans had managed to dismantle Social Security.

Can Mr. Obama achieve something comparable? Rahm Emanuel, Mr. Obama’s new chief of staff, has declared that “you don’t ever want a crisis to go to waste.” Progressives hope that the Obama administration, like the New Deal, will respond to the current economic and financial crisis by creating institutions, especially a universal health care system, that will change the shape of American society for generations to come.

Governments tend to expand in size and scope over time. They tend to expand during times of crisis such as a war and/or an economic crisis. What happened after 9/11? The Patriot Act, Homeland Security Department, expansion of TSA powers and rules, dubious wire tapping, Guantanamo Bay, etc. Now with the economic crisis there are cries that we should use the crisis to push through some sort of universal health care reform. Whiskey Tango Foxtrot? Since when did health care have anything to do with the financial crisis? Krugman has even argued that creating labor and industry wide cartels wouldn’t be a bad thing. Huh? Of course, such cartels would likely be monitored if not outright controlled by the government. Well okay then, full steam ahead. Monopoly power in the hands of government is always a good thing.

FILED UNDER: Economics and Business, Government, , , , ,
Steve Verdon
About Steve Verdon
Steve has a B.A. in Economics from the University of California, Los Angeles and attended graduate school at The George Washington University, leaving school shortly before staring work on his dissertation when his first child was born. He works in the energy industry and prior to that worked at the Bureau of Labor Statistics in the Division of Price Index and Number Research. He joined the staff at OTB in November 2004.

Comments

  1. tom p says:

    Since when did health care have anything to do with the financial crisis?

    Not exactly the financial crisis Steve, but I have heard the argument made that American companies are at a competetive disadvantage with companies in countries where they have universal healthcare (state sponsored) because those companies do not have to provide it. Ours do (in order to compete for the labor).

  2. anjin-san says:

    was the fact that his economic policies were too cautious.

    Poor implementation by Ickes was an issue here. Hopkins, on the other had, got rapid and impressive results from his portfolio.

  3. Steve Verdon says:

    So tom p. I take you don’t believe in the laws of thermodynamics and that somewhere there really is a free lunch?

  4. Rick DeMent says:

    The whole idea of “the free market” is a myth. It does not exist except as an abstract concept. Never has, never will. No sane person rejects the concept of government involvement in the larger economy at some level. The only thing being haggled about here is the level of that involvement.

    As for heath care or any other kind of government involvement whether it be a subsidy or protectionism the fact is that if other industrialized countries have more involvement (through universal health care, direct subsidies, or trade restrictions) then American companies are at a competitive disadvantage.

    The thing to do is balance is the relative power of business, government, labor and consumers in relation to each other so that no one of them can get the upper hand. But talk of “free markets” or “socialism” is a distraction from that simple pragmatic approach.

  5. odograph says:

    It seems bizarre to talk about Democrats and economic shock value when Paulson has been playing it so … not “well” per say.

  6. Steve Plunk says:

    While there is no truly “free market” there is always movement toward or away from free market ideas so using the term seems valid. It is a way to simplify arguments for more rapid consumption.

    There are too many differences in health care systems to make a judgment about competitive advantages or disadvantages with state sponsored systems. Part of our high costs has to do with what we expect from our health care provider. Remember when cost controlling HMOs were so vilified for making hard decisions? In many countries those HMOs are the government.

    Hayek made the “crisis” point many years ago. Why haven’t we yet accepted that government will either exploit a crisis or create one in order to consolidate the power it so desperately seeks?

  7. tom p says:

    So tom p. I take you don’t believe in the laws of thermodynamics and that somewhere there really is a free lunch?

    Steve, if you go back and read my comment with a fair modicum of comprehension, you will see that I said,

    but I have heard the argument made

    I never said I agreed or disagreed with it, mostly because I do not know, I posted that for merely informative purposes.

    But as long as you bring up “free lunches”, how do you feel about paying as much as twice what others pay for the 37th best care in the world?

    I don’t pretend to have the answers, but I do know it is way too complex to be fixed with the simple 2 word solution you propose for every economic problem.

  8. Drew says:

    “But as long as you bring up “free lunches”, how do you feel about paying as much as twice what others pay for the 37th best care in the world?”

    I feel fine, because the statistics cited are absurd.

  9. tom p says:

    The whole idea of “the free market” is a myth. It does not exist except as an abstract concept. Never has, never will. No sane person rejects the concept of government involvement in the larger economy at some level. The only thing being haggled about here is the level of that involvement.

    PS: Thank you Rick, you said it better than I ever could have.

  10. tom p says:

    I feel fine, because the statistics cited are absurd.

    Drew, with all due respect, the only thing absurd is your complete denial of them. Did you even bother to follow the links? One goes to an NYT editorial (I know you will trash it, but they cite the WHO) and the other to a graph by “Health Affairs”…

    Do you have comparable cites? Or are you just full of your own omniscience?

  11. Steve Verdon says:

    tom,

    I never said I agreed or disagreed with it, mostly because I do not know, I posted that for merely informative purposes.

    Fair enough tom. Yes I’ve heard those arguments too. And my view is that subsidizing one’s industry is not a path to riches. I think one would be hard pressed to find too many economists who think mercantilism is a good idea. Trade is not a zero-sum game.

    But as long as you bring up “free lunches”, how do you feel about paying as much as twice what others pay for the 37th best care in the world?

    I think it is dubious to make international comparisons at best. I’ve got several posts on it here. Part of the problem is definitions, and part of the problem has to do with populations.

    I don’t pretend to have the answers, but I do know it is way too complex to be fixed with the simple 2 word solution you propose for every economic problem.

    There is no solution that will really work, IMO, at least in the sense of increasing health care output/resources and reducing costs. Health care after all, despite everyone’s claims to the contrary, is a private good, not a public good. Every country I’ve looked at has a health care problem in terms of growth of spending vs. growth of their economy. It doesn’t take much to realize that when costs are going up by say 6% and the economy is growing by 3% you have an unsustainable situation.

    A significant part of the problem is two fold:

    1. Health care has moved away from the concept fo insurance.
    2. Consumption is at the individual level while costs are distributed at the group level.

    Both increase demand/consumption and result in a higher growth rate of health care costs.

    Rick,

    The whole idea of “the free market” is a myth. It does not exist except as an abstract concept. Never has, never will. No sane person rejects the concept of government involvement in the larger economy at some level.

    Anarcho-capitalists have argued that Iceland and the Old West were close to the idea of anarcho-capitalism.

    As for heath care or any other kind of government involvement whether it be a subsidy or protectionism the fact is that if other industrialized countries have more involvement (through universal health care, direct subsidies, or trade restrictions) then American companies are at a competitive disadvantage.

    That is not a fact but a conclusion that should be supported both theoretically and empirically, at the very least.

    Odograph,

    It seems bizarre to talk about Democrats and economic shock value when Paulson has been playing it so … not “well” per say.

    Missing the forrest because of the trees again I see. Klein has already painted/tarred the Republicans with this Brush. That is part of her problem, everyone who disagrees with her is lumped into one amorphous group and is made out to fit her own world view. When you look and quickly find actual evidence that shatters that world view she is completely unfazed. A true doctrinaire idealogue.

    If you think about what I’ve written you’ll see it isn’t singling out just the Democrats, but government and whomever happens to be “in charge”. So the problem with government continuing to expand both in terms of size and scope of powers during times of crisis applies to both Republicans as well as Democrats.

    Oh, and you do realize that when the government expands in terms of its powers, that usually means the citizens lose power as well, right? For example, does anyone remember that Clinton’s health care proposal prohibited any insurance that duplicated the plan offered under Clinton’s proposal? In short, you had no choice in what kind of health care you had access too. You either took their plan and their care, or…well there was no “or” that was the plan you got.

    Steve P.,

    Hayek made the “crisis” point many years ago. Why haven’t we yet accepted that government will either exploit a crisis or create one in order to consolidate the power it so desperately seeks?

    Actually this point goes all the way back to Karl Marx.

  12. Steve Verdon says:

    Drew, with all due respect, the only thing absurd is your complete denial of them. Did you even bother to follow the links? One goes to an NYT editorial (I know you will trash it, but they cite the WHO) and the other to a graph by “Health Affairs”…

    Do you have comparable cites? Or are you just full of your own omniscience?

    Tom P.,

    Do you know what counts for a “live birth” in England, France, Germany, Canada and the U.S.? Here is a hint: they aren’t all the same. Here is another hint: the U.S. has the broadest definition of them all. In the U.S. any birth is considered a live birth if the infant shows any signs of life at all, and heroic measures will be taken.

    So, with that in mind, what do you think of comparing raw infant mortality statisitics? That perhaps you should be cautious reading too much into them?

    A careful comparison of various health outcomes between countries has never, to my knowledge, been done, and I’ve been following this issue for 15 years at least.

  13. sam says:

    I think one would be hard pressed to find too many economists who think mercantilism is a good idea.

    Perhaps today, but at the nation’s founding, it was all the rage. See, The Tariff Act of 1789:

    The Tariff Act of 1789 (1 Stat. 24), signed into law by President George Washington on July 4, 1789, was the first substantive legislation passed by the first Congress. This act, together with the Collection Act of 1789, operated as a device both to protect trade and to raise revenues for the federal government. The constitutional authority for the act is found in the powers given to Congress “to lay and collect Taxes, Duties, Imports and Excises” and “to regulate Commerce with foreign Nations.” Among other things, the act established the first schedule of import duties and created an additional duty of 10 percent on imports carried on vessels “not of the United States.”

    But then, Alexander Hamilton was also instrumental in the creation of the United States Bank:

    The First Bank of the United States was a bank chartered by the United States Congress on February 25, 1791. The charter was for 20 years. The Bank was created to handle the financial needs and requirements of the central government of the newly formed United States, which had previously been thirteen individual colonies with their own banks, currencies, and financial institutions and policies.

    Officially proposed by Alexander Hamilton, Secretary of the Treasury, to the first session of the First Congress in 1790, the concept for the Bank had both its support and origin in and among Northern merchants and more than a few New England state governments. It was, however, eyed with great suspicion by the representatives of the Southern States, whose chief industry, agriculture, did not require centrally concentrated banks, and whose feelings of states’ rights and suspicion of Northern motives ran strong.

    The bank’s charter expired in 1811 under President James Madison. In 1816, however, Madison revived it in the form of the Second Bank of the United States.

    Damn, the government’s been meddling in the economy from the getgo.

  14. Dave Schuler says:

    A careful comparison of various health outcomes between countries has never, to my knowledge, been done, and I’ve been following this issue for 15 years at least.

    Me, neither. However, there has been a good comparison of waiting times for a variety of surgical procedures for the OECD countries. Generally, waits may be slightly longer in other places than here but not the nightmares that some folks over here are afraid of, at least not statistically.

    Not that you’re arguing against any of these points but the sad fact is that we pay a lot more for health care here than people in other OECD countries do. My study of the situation suggests that to understand why that is you’ve got to go back to the first ten or fifteen years of Medicare and Medicaid.

  15. Steve Verdon says:

    Here is an article on the differences of what constitutes a live birth.

    The United States counts all births as live if they show any sign of life, regardless of prematurity or size. This includes what many other countries report as stillbirths. In Austria and Germany, fetal weight must be at least 500 grams (1 pound) to count as a live birth; in other parts of Europe, such as Switzerland, the fetus must be at least 30 centimeters (12 inches) long. In Belgium and France, births at less than 26 weeks of pregnancy are registered as lifeless. And some countries don’t reliably register babies who die within the first 24 hours of birth.

    Note that the U.S. is the only one in that list that actually uses the WHO definition of what constitutes a live birth.

    And there is this as well,

    Infant mortality in developed countries is not about healthy babies dying of treatable conditions as in the past. Most of the infants we lose today are born critically ill, and 40 percent die within the first day of life. The major causes are low birth weight and prematurity, and congenital malformations. As Nicholas Eberstadt, a scholar at the American Enterprise Institute, points out, Norway, which has one of the lowest infant mortality rates, shows no better infant survival than the United States when you factor in weight at birth.

  16. I understand that free markets cause cancer, halitosis, and bunions. Somewhat surpised that Ms. Klein hasn’t made the connection yet.

    In other news, I have lived in England nd the US. Anyone who thinks the health care available in England is better than that found in the US is ignorant or lying. Sure you can find anecdotal situations of better care or treatment in carefully selected circumstances, but I never had to wait three days to see a physician in the US, which was routine in the UK. All the people I knew who had a choice deferred any treatments or procedures until they were back in the US, whether they held US or UK passports.

    Or maybe it’s just that pesky freedom thing that makes US health care so bad.

  17. tom p says:

    Fair enough tom.

    Steve, thanx.

    And my view is that subsidizing one’s industry is not a path to riches.

    I would agree (the most recent Ag bill is a prime example) but I do not feel that this is the same (health care for an entire population is not the same as subsidizing a specific industry.

    I think it is dubious to make international comparisons at best. I’ve got several posts on it here. Part of the problem is definitions, and part of the problem has to do with populations.

    Here is what I know: My mother in law (OK, my girl friends mother) is a 3 time cancer survivor, has had long time heart problems, etc, has never had to pay a dime for any of her scrips (or operations, or chemo, or radiation, etc)(outside of taxes), and yet, as per the graph I provided, they pay a little over half ( as % per GDP) or less than a 3rd in strict dollar to dollar comparison (the country is Spain)… So to say that,

    Every country I’ve looked at has a health care problem in terms of growth of spending vs. growth of their economy.

    while this is true, it ignores the fact that every(??) other western country is way ahead of us (they spend less, and get more, point, period, paragraph)

    A significant part of the problem is two fold:
    1. Health care has moved away from the concept of insurance.

    This is because it has been found that it is far more cost effective to deal with something before it becomes a problem (to draw a couple of obvious analogies: Cigarette smoking=lung cancer or high fat diets=heart disease)

    2. Consumption is at the individual level while costs are distributed at the group level.

    Steve, again this is true, but I reiterate, the rest of the western world is way ahead of us at this point in the game. This is not to say that their systems are perfect… but look at the cost/benefit ratio. The facts are the facts, and the fact is, they remain way ahead of us.

    What are we doing wrong?

  18. tom p says:

    Sure you can find anecdotal situations of better care or treatment in carefully selected circumstances, but I never had to wait three days to see a physician in the US, which was routine in the UK.

    Charles, out here in Crawford Co. I have given up on seeing an actual Doctor, and settled for the “Physicians Assistant” who may or may not diagnose my chest pains accurately (I have a good one and I trust her….) but still, I gave up on seeing an actual Doc in a time frame that was less than a week years ago.

    Do you know what counts for a “live birth” in England, France, Germany, Canada and the U.S.? Here is a hint: they aren’t all the same. Here is another hint: the U.S. has the broadest definition of them all. In the U.S. any birth is considered a live birth if the infant shows any signs of life at all, and heroic measures will be taken.

    Steve, I have no doubt that this is true (the religous right and all that) but do you have any links so that I can compare? I know the infant mortality rate is a widely disputed stat, which is why I stayed away from it. So, what? Are we spending thousands of dollars trying to keep a zygote oxygenated while even Spain has decided that this collection of cells is not worth the cost of saving? (I reach the far points of exageration here, but it is in an effort to seperate the apples from the oranges)

    The facts remain the same: they spend less than we do, and get more from it. Why?

  19. Steve Verdon says:

    This is because it has been found that it is far more cost effective to deal with something before it becomes a problem (to draw a couple of obvious analogies: Cigarette smoking=lung cancer or high fat diets=heart disease)

    I believe that in some cases the old saw of “an ounce of prevention is worth a pound of cure” is true…in some instances, but not all.

    Steve, again this is true, but I reiterate, the rest of the western world is way ahead of us at this point in the game.

    Yes and no. Other countries can decide a priori to limit access for certain types of treatment. For example, recent legal outcomes have effectively made in vitro fertilization techniques rather difficult in Canada. They have effectively outlawed a type of treatment still available here in the U.S. So once again, not exactly a careful and precise comparison across international systems.

    The facts are the facts, and the fact is, they remain way ahead of us.

    Statistics are a tricky thing. Like the infant mortality numbers. You have to make sure you are comparing like to like, otherwise your conclusions are suspect.

    Steve, I have no doubt that this is true (the religous right and all that)

    Religious right bullshit! It is a fact that the WHO’s definition of a live birth is any birth where the infant shows any sign of life. The U.S. adheres to that definition, other countries do not.

    …but do you have any links so that I can compare?

    Yes, see above.

    I know the infant mortality rate is a widely disputed stat, which is why I stayed away from it.

    It is one of the key statistics that is used to show that the U.S. has a sucky health care system.

    Nevermind that the U.S. subsidizes most of the worlds drug research, that there are demographic issues related to life expectancy, infant mortality, etc.

    So, what? Are we spending thousands of dollars trying to keep a zygote oxygenated while even Spain has decided that this collection of cells is not worth the cost of saving?

    No, I have a link above. Please, read it. You are mis-characterizing the issue.

    The facts remain the same: they spend less than we do, and get more from it. Why?

    Once again, there has been no careful and well thought out comparison of health care outcomes between countries that I’m aware of. Taking high level gross statistics and comparing them is, at the very least, dubious if not outright intellectual dishonesty. You want to account for heterogeneity of the population got example as well as differences in terms of definitions such as what constitutes a live birth. Then you’d need to account for the fact that a large percentage of drug research takes place in the U.S. but isn’t reimbursed by other countries. Yeah we spend alot…but the fact of the matter is our health care system is alot like France’s a mix of public and private. Why is their’s so much lower than ours?

    If you can’t explain it, maybe you don’t know as much as you think. I can’t explain it, and I’ve been following this issue for at least 15 years.

  20. just me says:

    Having experienced government run healthcare while my husband was in the military and his experiences as a disabled veteran with the VA I have little confidence that the US government or even the state government could effectively manage a healthcare system that is better than the one I currently have.

    When in the Navy, my daughter got very sick. Screaming and crying and running a fever. I called for an appointment. I was offered an afternoon appointment three days away (the nurse did tell us we could always go to the ER if we needed same day treatment but there were no appointments available for that day). If my daughter got sick today, I could call at 4 o’clock in the afternoon and get a same day appointment with her doctor. The on call doctor at their practice does after ours sick visits.

    The VA here where we currently live is a joke, and often the doctors turn over quickly and some of them are complete idiots and the VA also does not provide certain kinds of medications. The best drug my husband has ever taken for his asthma (which is considered a service connected disability for him) is advair, but the VA refuses to give it to him, so rather than have his asthma under excellent control he takes a medication that isn’t as effective and deals with more frequent asthma attacks.

    I don’t want this kind of care, even if it saves me money.

    And if anyone wants to know just how bad care for children with autism is in other countries, they should hang around on autism boards. I am appalled at how long it takes to see a doctor for just an initial visit in some places.

  21. odograph says:

    Reviewing the top article, the fear seems to be that Democrats “won’t let a crisis go to waste.” This is a forward looking fear, without much detail. People worry that they might do X medical plan when X has not been proposed.

    I of course miss that “forest” for the “tree” that this current administration is not letting the crisis going to waste, and is funneling a trillion (or a few, depending on how you count it) to Wall Street.

    Let’s see … current crisis response:

    The government guarantees and investments extended under the rescue program now include $250 billion set aside for the Treasury to buy stock in U.S. banks, hundreds of billions in aid to giant financial institutions, and hundreds more billions in special lending facilities to banks.

    The potential cost for the government’s efforts to contain the financial crisis now approaches $7 trillion and is climbing. That figure includes large commitments of funds by the government to guarantee certain debts, although those funds may never actually be spent. But still, the overall figure reflects the huge liabilities the government is taking on in response to the meltdown

    Is this really the correct time to worry about maybe-medical-plans of the future?

  22. odograph says:

    BTW, I understand how if you consider yourself a conservative pundit, you might want to spend more time on future Democratic errors. Errors which have not actually happened yet.

  23. Steve Verdon says:

    BTW, I understand how if you consider yourself a conservative pundit…

    What you understand is not that impressive.

    Here is a hint: I’m not a conservative.

  24. odograph says:

    I was really speaking of the site, and its “friendlies”.