SOURCE: Brookings Institution
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Rebecca Blank is a labor economist and the Robert S. Kerr Senior Fellow at the Brookings Institution. Prior to Brookings, she was dean of the Gerald R. Ford School of Public Policy at the University of Michigan and co-director of the National Poverty Center. Blank is a member of the United Church of Christ and chaired the committee that wrote, “Christian Faith and Economic Life,” a statement adopted by the general synod of the UCC in 1989.
She talks with Sally Steenland about the recession, failures of the market, populist anger, and the role of faith communities during this time of economic turmoil.
Sally Steenland: Rebecca, you’re a leading labor economist and also a person of faith. Can you talk about how these two identities shape your work? Is there anything distinctive about your work because you’re a Christian?
Rebecca Blank: The work I do as an economist has very much been shaped by the commitments that come out of my faith background. I’ve tried to focus throughout most of my research career on questions [of] what’s happening to people. How does the economy affect families and individuals? And how do individuals and families, in turn, affect the economy? The call within the Old and New Testament to care about the widows and orphans, to use Old Testament language, gives the right sense.
As a mainstream economist, I work out of the standard models of economics. By the time I went to graduate school in economics, I’d absorbed enough theology and other perspectives on how the world works that I’ve always been aware of the value of many economic models, but also their limitations. There are many ways in which people respond to incentives to be self-interested, make a profit, be productive—but people also have a real capacity for goodness, and they do things that don’t just benefit themselves. To use religious language, there is sin in the world. And sometimes people do things that are, in the long run, quite harmful to themselves, as well as others, for the sake of short-term greed.
Sally Steenland: Let’s follow up on that. Some say that [financial] institutions have to be built realistically and acknowledge that people are imperfect—and that if a market is built on idealism, it can have unintended bad effects. How do you balance the tension [between selfishness and goodness]?
Rebecca Blank: It is precisely because I believe individuals are hardly perfect and the institutions we create are far from perfect—whether they are market institutions, political or civic institutions—that I believe you need a series of checks and balances. [That] was one of the contributions of the founding fathers putting together the Constitution. In similar ways, you need checks and balances on markets. Free markets are humanly created systems. And because they have the imperfections that we as human beings bring to them, you would like a series of checks and balances [that are also imperfect]. It is precisely why you need to regulate behavior.
I believe that market failure is pervasive in different markets and situations. [One of the ways] to provide a check on some of that is simply providing information—putting the date on which a milk carton expires helps consumers understand what they’re buying—that’s a regulation that milk producers might not do voluntarily. At a very different level, the SEC does transparency regulation of financial markets, requiring the disclosure of a whole set of information so that investors can know what they are buying. Obviously, in the recent past, those disclosures have not been as complete as they should be. But that is the interaction and art of how far do you go in the policy arena and how far do you let the market move forward by itself.
Sally Steenland: When you look at the failures of regulation, the lack of transparency and accountability, a lot of this is very technical, but people are increasingly saying that these are moral failures. Where do you land on that?
Rebecca Blank: We’re currently in a rather deep recession. It’s not the first recession the U.S. has experienced. I am enough of an economist to believe that there are regular business cycles. And business cycles are in many ways embedded in the way in which the economy functions.
Moral failure strikes me as probably the wrong term here. It is a failure of appropriate business analysis inside a lot of these firms, but it’s also clearly a failure of appropriate regulation by the public sector. I think that many of the individuals, both in the policy world as well as the business world, who got caught up in these problems were simply doing what they thought at the time was the right thing to do. And that goes back to our imperfections as human beings. It’s frequently true that we can do exactly what we think is the right thing and the same thing that all our neighbors are doing, and we can look back five years later and say ”Boy, were we wrong.”
Are there some individuals who took undue advantage of the system? Bernie Madoff is obviously an extreme example, [and] people who focused on short-term profit and ended up hurting institutions and a lot of investors. I hope we call some of those people to judgment, and, clearly we are. But anyone who knows the history of economics knows that we have a serious of price bubbles and enthusiasms and that people get caught up in the promise of something that is just going to work wonderfully and make them a lot of money. It’s part of human greed and enthusiasm.
I think that the true moral question that faces society is when we go into the downturn, how do we respond to the people who are hurt? What do we have in place that helps those who lose their houses and pension savings, who find themselves struggling and in pain?
Sally Steenland: Is there a way to structure regulation and markets so that these bubbles and crashes are not as extreme? To do prevention, rather than rescue?
Rebecca Blank: One of the real successes post-World War II is that we have had much less of a cyclical economy than in the late 1800s to the early 1900s. Our recessions have been milder, our upswings longer and stronger. A deep recession in the early ‘80s, and this [current one] were the two serious recessions post-World War II, and we’re now 70 years since that era.
One of the big questions of economics is how do you mitigate business cycles? How do you try to prevent bubbles and crashes? I think we have learned quite a bit in the economics profession. Some of that is being put to use right now in the Federal Reserve Bank, the Treasury, and Congress—and hopefully it will be effective. It is clearly a moral challenge, but also an economics and political challenge as to how you put together the regulatory system that protects people.
Let me talk about a number of successes we have in place that provide exactly those sorts of protection. The presence of the Federal Reserve system and the protection it has provided has been incredibly important. Unlike in the 1930s when you saw a variety of small bank failures across the country, you have seen almost no local or regional bank failures here. That’s in part due to the federal protection and deposited insurance that we have available. Social Security means that not all the income of senior citizens is lost. Many people are receiving regular Social Security checks and relying upon them more than ever. Thinking about what have we done and what we can do in the future is where we need to be focusing our efforts.
Sally Steenland: When this recession hit, some people said “nobody saw it coming,” almost as if it were an act of God. It sounds like you’re saying that’s not true, that if we can’t prevent recessions altogether, we can certainly lessen their extremity and shorten their duration.
Rebecca Blank: Absolutely. The fiscal stimulus bill that we passed [stems from] lessons learned from past recessions. When you don’t have credit flowing and people are feeling very conservative, you’ve got to prime the pump and jump start the economy. Who can do that? The government because it can deficit finance, print money, increase demand, and get the economy moving again. One of the mistakes we made in the 1930s was not doing enough of that. Many people think it was the mistake the Japanese government made in the 1990s when they went through 10 years of very slow growth. We’re trying very hard not to do that. So we do learn things over time, and it’s a combination of economics and policy. Sometimes it is hard to implement because not everyone is in agreement as to what the right solutions are.
Sally Steenland: I’d like to talk about the role of faith communities in this time of economic turmoil. Many are first responders in their communities and congregations. They’re seeing their budgets cut, even as need is growing. They do direct service and out of their prophetic voice, advocate for better policies and different priorities. What role do you see for faith communities?
Rebecca Blank: Obviously communities of faith are there to serve a community. There are a lot of unemployed and worried people facing financial and economic pressure, and faith communities are doing all sorts of things to help, from direct assistance to putting together support groups and trying to be a source of assistance, faith and hope in the midst of very difficult times. That’s an incredibly important role. Many faith communities feel called to be involved directly in community action. One of the problems is that many state and government functions are being cut back, and I know a number of congregations trying to do more in terms of direct food assistance, homeless assistance or other community service.
An equally important role—and this is the prophetic role—is going to policy makers and saying, you cannot cut these programs, you have to respond to this pain—saying ‘We as a community of faith care about the widows and orphans, those who are homeless and marginalized….and we demand that the institutions within our civic society respond as well.’ It is very important for congregations to keep articulating a sense of priorities about what it is that government needs to be doing in a recession to provide the safety net and help those who are hurting.
Sally Steenland: There’s a lot of public anger at the gap between executives [making a lot of money] and people losing their homes, jobs, health insurance. What are your thoughts on that?
Rebecca Blank: It is a very human response that we want to find villains and someone at fault for the problems we are having. [But] we live in an incredibly complex political and economic system, and there are rarely single villains or causes—and not to this problem either. In that way, the desire to assess blame and point fingers is part of our human failure. On the one hand, you want to ask what went wrong, how do we prevent this and call to account people who committed clear crimes—but trying to tar groups of people—“This is all the bankers’ fault” or “This is all the fault of Congress”—is a clear over-simplification and, I think, part of human sin to want those sorts of judgment. At the end of the day, those are the judgments that should be left to God. Let God determine who was and who wasn’t guilty. The banker down the street we may be angry at might have been the person inside the firm who was actually saying “No, we shouldn’t take these risks,” and trying to argue for different behavior, and we don’t know that. So being angry at classes of people doesn’t get us very far.
Our political leadership needs to be called upon to try to address some of that anger, soften it to a certain extent and present a more realistic picture of the complexity of the world—that there are multiple causes and responses and we need to be dealing with a complex reality rather than pointing single fingers.
Sally Steenland: One of the things you’re saying is that people are acting as if they’re God and saying, “I know what is in your heart even though I don’t know you, and you’re evil.” Making those judgments is probably not valid.
Rebecca Blank: We live in an imperfect world, and all of us are capable of evil and good. One of the things we have learned in our diplomatic endeavors is that often times you have to work with people you disagree strongly with and may not always be doing good things. But it is often better to work together and try to create connections and bridges than simply build walls. One of the things we are trying to do in Iraq or in Afghanistan is to take tribal leaders who might have been affiliated with people we considered enemies and bring them over to our side.
There’ve been a lot of problems in the banking system and banks not behaving well in the recent past, but we need a banking system, we need a financial system and we need the people who are responsible for banking and finance to be working with us, not against us. We need to find ways to restructure that system to where we’re working together effectively.
Sally Steenland: What would you say to some of the faith and advocacy voices who are saying that capitalism is corrupt, the ideology of the free market is totally wrong and we need to reinvent our economic system to be fair and just?
Rebecca Blank: I have great sympathy for that perspective, but I think that it can be too simple at times. I am enough of an economist to believe that markets do effective things. When markets function effectively, competition keeps prices down and stimulates productivity. If you can come up with new inventions that produces a product a little more cheaply or a slightly better product, the incentive that you can make some money is not unimportant. I believe in markets and in many cases where we brought down poverty throughout the world, it’s partly been because of the spread of markets and the marketization of certain economies.
That said, markets have enormous problems and, as I noted earlier, there is widespread market failure. So the question is not how you get rid of markets, but how do you regulate markets? And how do you, on top of a market economy, create a set of civic institutions that provide safety nets for those who become unemployed or those who are not able to participate in a market because of health problems or because of age or other reasons.
The real challenge for our economy is creating this balance between market and regulation and between extra-market events. How do we make sure that we take care of the hurting, the homeless, the hungry, and the unemployed among us? I think our economy has often been quite lax about that. Our safety net has not been as good as the safety net in some other countries. So in that sense, I have a lot of sympathy for people who want to use this crisis as a way to raise those issues and say, ‘Let’s look at our safety net, let’s see how effective we are at helping people who are now in 50 weeks of unemployment or have lost their wealth or their home. I’d love to see more attention to many of those issues, but I do think it has to be balanced with an awareness that we don’t want to get rid of a market economy—we want to make it work effectively.
Sally Steenland: I have one last question. In terms of this financial crisis, has anything about it surprised you, or reinforced your economic theories and beliefs?
Rebecca Blank: I’ve never been a true believer in free markets. I have always thought our markets needed structures and regulations around them and this reinforces that sense. What I have found most surprising, quite honestly, is the complete unawareness of a number of people in these financial markets of what exactly it was that they were trading and what the risks were that they were taking. Financial markets have historically been pointed to as some of the most transparent. The people are real experts. They know exactly what they are doing. These are markets that operate very effectively and…[it turns out] you have a bunch of very highly skilled intelligent folks who are out there trading derivatives and trading various instruments, and they haven’t a clue what they’re doing.
It reminds us all over again of how very limited all of us are and how humble we need to be about what we know and don’t know, and about the extent to which transparency and outside regulation that force people to step back and say ‘What is really going on here?” can be deeply important, not just for us as individuals, but for the overall economy.
Sally Steenland: This has been a delight and a pleasure. Thank you very much for talking with us.
Rebecca Blank: Sally, thank you.