George Will on Politics and the Economy

Federal Reserve Chairman Ben Bernanke's statement last week that economic conditions are "skewed to the downside" was the most muted assessment of a dismal situation since Emperor Hirohito, in his surrender broadcast after Hiroshima and Nagasaki, said, "The war situation has developed not necessarily to Japan's advantage." There often are, however, upsides to downsides.

Furthermore, in this transformative summer, America's political argument is being fundamentally recast in two ways that will reverberate long past November.

In today's Niagara of bad news, the melancholy fact that General Motors' market capitalization recently dipped below that of the Hershey chocolate company testifies to the efficiency with which the market is working: It is punishing the U.S. auto industry for products incompatible with consumers' rapidly (but perhaps not irreversible) evolving preferences shaped by bad experiences at the pump. And the fact of $145-a-barrel oil may have had the beneficial effect of undermining those people who remain eager to strike Iran militarily, thereby producing a $200 price.

There actually are people eager to enter a third war, even as conditions in the first—Afghanistan—worsen. The worsening might be, in a sense, partly because of recent success in the second, Iraq, where there is this downside to the upside: The success of the surge was purchased with troops urgently needed in Afghanistan, where July probably will be the third consecutive month in which U.S. fatalities exceed those in Iraq.

In recent weeks, two formerly bright lines of political demarcation have become indistinct, in both cases to Barack Obama's advantage. One is the line between his and John McCain's positions regarding Iraq. The other line is crucial to conservative critiques of liberal interventionism in domestic policy, the line between the public and private sectors.

Obama vows to withdraw from Iraq as quickly as possible—consistent with the safety of U.S. forces, including residual forces left there for training and other purposes. And consistent with the stability of that country. So Obama acknowledges that there is an important U.S. interest in Iraq's stability, and he promises a surge of sorts in Afghanistan. The Iraqi government's semi-endorsement of a semi-timetable for U.S. withdrawal, made in the context of the deteriorating conditions in Afghanistan, has undercut McCain's assertion that "timetable" is a code word for surrender. So what is the supposedly stark demarcation between Obama's and McCain's policies?

Domestically, the relationship between the national government and the nation's economy has changed more in recent weeks than at any time since the Depression. During the New Deal, the pell-mell expansion of government supervision of economic life was propelled primarily by fears generated by cascading events. But another propellant was a constellation of doctrines—about capitalism's "contradictions," "market failures" and the need for socialism, or at least "planning" through government control of the economy's "commanding heights." Today, the "social safety net"—a phrase that originally described aid for widows and orphans—is being radically enlarged to provide security for investors in large financial institutions. This enlargement is being improvised by conservative Republicans whose only doctrine is the theory of TBTF. The theory is that this or that institution is too big to (be allowed to) fail.

Today's surge of "conservative corporatism" began with the Bush administration's brokering of JPMorgan Chase's takeover of Bear Stearns. This let loose the argument—a non sequitur—that if the administration thinks the national interest is implicated in the survival of this or that big economic entity, the administration is morally obliged at least to acquiesce in Congress's solicitude for individuals with mortgage problems. The administration has restricted the free practice of capitalism between consenting adults—the short selling of the stocks of 19 financial institutions. And the administration wants Congress to cede to it the power of the purse, granting it an unlimited call on federal funds to guarantee Fannie Mae's and Freddie Mac's obligations.

The theory, which might be right, is that such a guarantee has always been "implicit" in the existence of such "government-sponsored enterprises" that are created by government to do something it favors, in this case, democratize access to housing loans. The theory also is that having the resources to bail out those two entities will make bailing them out unnecessary because investors will not lose confidence. Nevertheless, this looks like semi-socialism—keeping profits private, but socializing losses.

The romance of capitalism was never more intense and the prestige of entrepreneurs was never higher—not in the Gilded Age, not in the "roaring '20s," not in the "go-go" Reagan years of tax-cutting and deregulating—than in the 1990s. That was during a Democratic administration, which had the good luck to coincide with the flourishing of information-technology industries.

Today's conservative corporatism of the Republican administration might "work," meaning it might minimize the duration of, and damage from, the current crisis. It is, however, complicating McCain's task of depicting Obama as a reckless enlarger of government. McCain is losing recourse to conservatism's core message about the rationality of governmental minimalism that allows markets to inflict their rigors.