The Fall of the Other Berlin Wall

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The meaning and ascendancy of the left has revolved around two overriding principles: the denunciation of the market as a source - in the left's view - of inequalities and destitution, and the advocacy of state interventionism as a panacea suited to overcome what it views as the perverse effects of the interplay of market forces.

On the basis of these founding premises, the conglomerate of political forces that initially formed the left broke ranks as early as the beginning of the 20th century, giving way to two distinct, and often rival, movements: a totalitarian wing - inspired by Lenin and Trotsky, that strove for the instauration of a central planning mechanism intended to do away with free market and private ownership - and a democratic variant, represented by Europe's social democracy and America's liberals, whose purpose has been to tinker with market forces through State levers - public spending and entitlements to disadvantaged groups - as a means of reducing inequalities and improving the living conditions of low-income groups.

The ideas and slogans of the left have shaped modern conventional wisdom to a considerable degree by assuming it had the monopoly on compassion - as well as the key to the solution. But suppressing or thwarting market forces and imposing state interventionism entails misallocation of resources and low productivity; which, ultimately, boomerangs against the well-being of the very social groups that it intended to help.

All too naturally, such counterproductive efforts proved to be more devastating in the countries that had gone to the extremes of state interventionism, namely the communist countries. The totalitarian adventure proved to be a total fiasco, and managed to stay alive only by means of a ferocious repression and by raising walls that deprived men and women of the possibility to emigrate to the capitalist "inferno." That experiment finally succumbed with the fall of the Berlin Wall.

Another wall, however, has held upright. It is the wall erected by the democratic left, not with bricks and wires, but by instilling into the conventional wisdom an infatuation with state interventionism that precludes the leaders of major industrial countries from trying market-friendly policies.

Yet it so happens that now this wall, too, is falling apart. The present economic crisis has dealt a fatal blow to its three basic pillars, namely:

a. The policy of easy access to credit promoted by Jimmy Carter's Community Reinvestment Act (1977) and subsequently by Bill Clinton and Fed's chairman Alan Greenspan. Measures of this nature were enacted so as to facilitate the access of low-income groups to house ownership. Such measures, however, created the housing bubble that ended in the Subprime mortgage crisis, the main victims thereof being the low-income households hit by foreclosures.

b. The Keynesian recovery plans, which have been brought to their paroxysm by the Obama administration, with a stimulus package of hundreds of billions of dollars that has failed to produce the expected results in terms of reigniting growth and reducing unemployment.

c. The European-made welfare state, which, because of the resources it diverts to the coffers of the state and the labor-market rigidities it creates, lies at the origin of the industrial hollowing out, the capital flight and the astronomic levels of sovereign debt that are impairing the international competitiveness and the debt-redemption capacity of a growing number of European countries.

The Berlin Wall collapsed only after the communist regimes of Eastern Europe had run out of options. From Stalin's gulag and forced labor, to the New Economic Mechanism of Janos Kadar in Hungary, and the "Socialism with a Human Face" of Alexander Dubcek in Czechoslovakia, up to the Perestroika of Mikhail Gorbachev in the Soviet Union, everything was tested, in vain, to salvage communism.

In the same fashion, the democratic variant of the left has today no further alternative at its disposal. In Europe, bailouts to Greece follow one another without removing the specter of default, while other countries gearing towards a debt crash (Spain, Italy) are too big to be helped. In the U.S., after the failure of an $800bn stimulus package and two rounds of quantitative easing, the mere fact that President Obama is announcing measures, such as, an "infrastructure bank" - the impact of which would be trivial at best - is clear proof that the point of policy exhaustion has already been attained.

The time has thus come to cross the ruins of the conventional wisdom shaped by the democratic left and emigrate to the side of the market-friendly policy vision that proved its efficacy at the times of Paul Volcker, Ronald Reagan and Margaret Thatcher. Then the wall may truly be said to have fallen.

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