Monthly Archives: June, 2009

Yet I think they make a number of implicit assumptions that are debatable and call into question the accuracy of the story they tell, not to mention the proposed remedies for the alleged problem. Let me outline six: educational attainment lowers inequality; lower inequality is needed and desirable; higher educational attainment promotes economic growth; more public spending will promote higher attainment;therefore, more public education spending will mean more economic growth;and finally, differences between human beings in cognitive skills and other personal attributes are relatively unimportant.

The notion that enhanced educational attainment will raise income equality rests on the assumption that an increase in the proportion of educated workers relative to less educated ones will lower wages of the former group relative to the latter. This is what probably happened around 1970 when college enrollments were soaring. It might well happen that way, but statistical work that Daniel Bennett and I have been conducting suggests that the relation between educational attainment and income equality is not so clear-cut. Some preliminary results even suggest the opposite: higher educational attainment is associated with more inequality. But even if Goldin and Katz are right, there are other reasons why conventional policy responses may have little effect. To cite one problem, my associates and I at the Center for College Affordability and Productivity have observed that the statistical relationship between state higher education appropriations and the proportion of adults with college degrees is not positive, even after allowing for various lags for graduation rates to catch up with the higher spending.

Goldin and Katz clearly believe greater income equality is good for America. They grudgingly admit that "some degree of economic inequality may [emphasis added] be desirable to spur incentives...." But there is no discussion of the equality-efficiency trade-off. Why is the income distribution of 1970 "good" and that of 2008 "bad"? How do we know? Inequality’s alleged threat to social order is not documented, and some polling results suggest interpersonal variations in income are less controversial than the authors suggest, Obama’s election notwithstanding. Moreover, the inequality in the distribution of lifetime income, or of consumption spending, is far less substantial than suggested by income figures for any single year.

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It is true that areas with relatively high levels of educational attainment have typically grown more than areas with less educated populations. But the question is: will the resources devoted to increasing the proportion of well-educated people generate a return, in terms of incremental income, that justifies the expenditure? In reality, human beings differ, and those with the greatest motivation to acquire higher skills havelargely done so. Is it necessarily true that increasing the proportion of students attending college will promote higher incomes? Attending college is not costless, and those costs rise and the benefits decline as we reach further down into the pool of talent. The authors approvingly talk of surging educational attainment in Europe—but fail to note that economic growth rates there have fallen, averaging levels lower than in the U.S. in recent decades. Surging European educational attainment has been associated with falling, not rising, growth rates.

Goldin and Katz assume that higher spending on higher education will increase attainment rates. States spending more on higher education do indeed get higher college attendance, but only modestly so. Most such increases do not go to hold tuition charges down or increase financial aid to the poor, and therefore it isn’t surprising that we do not find a positive relationship between state spending in higher education and the proportion of adults with college degrees. The call for more public spending on education implies it will enhance economic growth rates, and the authors even state that "the short-run fiscal burdens of increased spending on education are likely to be more than offset in the long run with increased tax revenues from a more productive workforce and lower public spending to combat social problems." Yet when we run numerous regressions using statewide data on the relationship between higher education spending and economic growth, we typically get a negative relationship: higher spending, lower growth. Money taken from the market-disciplined competitive sector to finance less efficient universities partially isolated from market forces by third-party payments seems to have a negative growth effect.

Goldin and Katz implicitly assume that education causes the difference in incomes and productivity between high school and college graduates. Underlying their argument is an unwritten assumption that all people are created equal in terms of cognitive endowments, motivation, discipline, etc. It is extremely difficult to correct econometrically for all the human variations in characteristics, and I believe at least some of the wage differentials that the authors associate with education relate to the fact that typically college graduates are brighter, harder working, and more dependable, than those who leave school after getting a high school diploma.Had they not even gone on to college, these young strivers would have earned more than the existing pool of high school graduates.

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College is a screening device—a point ignored by the authors. Employers hire workers with college degrees because the diploma raises the probability that the graduate will be talented and diligent, because the colleges themselves have screened their entrants,admitting those with some prospects for success, and then not graduating close to half of them (another point ignored by Goldin and Katz), many for being deficient academically. While their book has a bibliography of well over 500 entries that covers 28 pages, there is not a single reference to The Bell Curve (1994), the well-known work of Richard Herrnstein and Charles Murray on the importance of cognitive endowments to educational attainment and vocational success.

Books discussed in this essay:

The Ascent of Money: A Financial History of the World, by Niall Ferguson

The Return of Depression Economics and the Crisis of 2008, by Paul Krugman 

Any list of inventions that have transformed the human condition would include the plough, the printing press, the steam engine, and the generation of electricity. But perhaps the greatest of all is the creation of money, because money is the essential foundation of all modern societies. It is money that dispenses with the traditional quest for self-sufficiency and the clumsy reliance on barter, enabling people and organizations to specialize. Prosperous, technologically advanced societies could not exist without the widespread acceptance of money.

This is so obvious that we rarely think about it, but once we do, we instinctively recognize that money’s existence is something of a miracle. After all, we routinely take as tokens embodying real value pieces of paper—whether bills or checks—with little intrinsic worth. Even more astonishing, we have moved from paper to electronic money. We regard digital computer entries that we cannot see or touch as repositories of value. That these leaps of faith occur billions of times a day defines money’s requisite traits: trust and confidence.

We are now rediscovering this truth, because the world has experienced since August 2007 what is generally regarded as the worst financial crisis since the Great Depression of the 1930s. Some venerable institutions including Merrill Lynch, Bear Stearns, and Lehman Brothers have gone bankrupt or merged into stronger rivals. Large parts of the credit market—involving the "securitizing" of home mortgages, auto loans, and credit card debts into bonds—have shrunk dramatically. The economy has plunged into a deep recession. People wonder what happened. What caused confidence and trust to collapse?

The crisis also reminds us that the story of money is more than a curious historical detour. It’s a central artery of civilization, because the spread of money led to the invention of finance, another building block of modern societies. Finance—whether by banks, securities markets, insurance contracts, or government—enables nations to save and invest for tomorrow. Along with specialization, the regard for the future made sustained economic growth possible. But as historian Niall Ferguson shows in his highly readable and informative The Ascent of Money: A Financial History of the World, money and finance have historically been a double-edged sword. They’re usually a tremendous boon—and yet can also bring calamity.

"[P]overty is not the result of rapacious financiers exploiting the poor," he writes.

It has much more to do with the lack of financial institutions.... Only when borrowers have access to efficient credit networks can they escape from the clutches of loan sharks, and only when savers can deposit their money in reliable banks can it be channeled from the idle rich to the industrious poor.

But financial breakdowns shred the fabric of ordinary life, undermining political and social cohesion. Lenin allegedly said that the best way to destroy a society is to debauch its currency. Banking panics and market "crashes" can be fearsome. "[F]ew things are harder to predict accurately than the timing and magnitude of financial crises," Ferguson argues, "because the financial system is so genuinely complex and so many of the relationships within it are non-linear, even chaotic."

What can’t be easily understood can’t be easily controlled. The origins and causes of the present economic crisis beg for greater clarity. Ferguson’s panoramic overview of finance and Paul Krugman’s The Return of Depression Economics and the Crisis of 2008 get us part of the way to a better understanding. But there’s more to the story than they imagine, or tell.


Money’s Origins

We learn from introductory college economics that money serves three purposes: it is a medium of exchange, a unit of account (that is, a way of setting prices), and a store of value. Ferguson, the Laurence A. Tisch Professor of History at Harvard University and William Ziegler Professor at Harvard Business School, traces the earliest use of money to Mesopotamia about 5,000 years ago, when clay tablets were sometimes used to confirm specific transactions. The Romans had coins made of gold (aureus), silver (denarius), and bronze (sestertius), but for much of history most people had little recourse to money. In Civilization and Capitalism, 15th-18th Century: The Structure of Everyday Life (1992), the historian Fernand Braudel noted that the money economy "was nowhere fully developed, even in a country like France in the sixteenth and seventeenth centuries...."

Until the last few hundred years, money generally meant metals whose natural scarcity was thought to guarantee their value. The Roman coins reflected this logic; gold was worth more because there was less gold. In the medieval world, the quest for wealth often became the pursuit of gold and silver. The Crusades, Ferguson contends, were at least partly intended to plunder the Muslim world of its precious metals. The explorations of the 16th and 17th centuries sought, too, to ease Europe’s scarcity of metals. The discovery of vast silver deposits in Peru and Mexico made Spain a dominant power. Convoys of up to 100 ships transported the metals to Seville, where the crown took a fifth for itself. In the late 16th century, this metallic bonanza accounted for nearly half of Spain’s royal spending.

Trade and war were crucibles of financial innovation. In Florence, the Medicis built their 15th-century banking empire in part by pioneering "bills of exchange": merchants who could not be paid immediately by their customers received "bills" (in effect, promissory notes) pledging payment at a fixed future date; the merchants could then raise cash by discounting the bills (that is, selling them at less than face value) with the Medicis’. Bonds were created, Ferguson relates, by Italian city-states—initially Venice and Florence—to pay for wars. Wealthy families were required to make loans that, in theory, would be repaid from taxes in peacetime.

Gradually, gold and silver coin (referred to as "specie") begat credit, new securities, and paper money. The Dutch invented the modern corporation—and common stock—with the creation in 1602 of the United Dutch Chartered East India Company, which received a government monopoly on the country’s trade with Asia. In Amsterdam alone, there were 1,143 initial investors in this early "joint stock company." (The English East India Company, founded two years earlier, was only an eighth its size.) A stock market quickly arose to allow investors in the Dutch company to sell their shares. Paper money emerged as a way of minimizing the burdensome transfer of large stashes of coin. The Bank of England, created in 1694 to help pay war debts, received distinct privileges in return for investors "converting a portion of the government’s debt into shares in the bank." The most important of these came in 1742: a partial monopoly on the issuance of paper notes in and around London.


Mississippi and the South Sea

By the 1800s, then, many features of modern financial markets had come into being. There were banks, stock markets, paper money, creditors, debtors, and investors. This system enabled merchants to get loans to ship goods before receiving payment and farmers to buy supplies before harvests. What we now call consumer credit barely existed. Stock and bond markets encouraged the aggregation of investment capital for new ventures—canals, railroads, textile mills, and (later) steel mills. Then as now, financial intermediaries—mostly banks and merchant banks (which sold bonds for governments, railroads, and other industrial concerns)—were thought necessary to evaluate the risks of lending and investing. It was their ability to separate good loans and investments from bad that gave them a moral claim to profits and protected other peoples’ money. Risk was spread and calibrated.

That was the theory.

In practice, financial panics and crashes have a long history. Profits were not always ensured; money was not always protected. Among early crises, France’s "Mississippi Bubble" and England’s "South Sea Bubble," which occurred almost simultaneously in the early 18th century, are well known. Both crises involved attempts to reduce steep government debts, incurred mainly to finance wars, by offering shares in new entities that were granted exclusive privileges: in France, trade in the Louisiana territory west of the Mississippi River; in England, a monopoly on trade with Spain’s South American empire (the South Sea). The prospective profits aimed to convince the countries’ creditors to exchange their old claims for shares in the new enterprises. Today, we’d call this a "restructuring" of government debt.

Probably the advertised profits would never have materialized. But these schemes collapsed quickly, because the promoters could not resist speculative temptations. Early investors—including the promoters—stood to make a fortune if the price of their shares doubled or tripled. In France, John Law, a renegade Scotsman, designed and managed the plan, including a bank that could issue paper money. Law promised 40% dividends on shares of the Mississippi Company. The dividends were paid with paper money. Investors could buy new shares by borrowing (again, in paper money) against the old. In June 1719, the Mississippi Company issued stock at 550 livre per share. By early September, the price was 5,000; by early December, it was 10,025!

Inflation emerged with a vengeance, as the volume of paper money (which supplemented gold and silver) soared. By the fall of 1720, Paris prices had roughly doubled from two years earlier. Meanwhile, shares of the Mississippi Company dropped to 1,000 in December and continued to plunge. Riots erupted; Law was briefly imprisoned. In England, the South Sea Bubble was smaller and less ruinous because its promoters could not create paper money at will. South Sea stock rose by a factor of 9.5 from its initial prices to its peak, Ferguson relates. The comparable increase for the Mississippi Company was 19.6.


Fixing the System

Money and finance posed other perils. One was inflation. But that seemed a problem only when countries abandoned gold and silver—as the French did in 1720 and later in the Revolution—and printed vast amounts of paper money. Mostly, paper money was limited by a country’s supply of gold. The Bank of England’s paper notes could by law be redeemed for gold. By the late 1800s, most developed countries had adopted the gold standard. In the United States, paper money had always been redeemable for gold or silver, with the notable exception of more than $500 million of "greenbacks" issued to pay for the Civil War. In the late 19th century, Americans’ main complaint was deflation, or falling prices, because new gold supplies didn’t keep pace with the demand for money. Debtors, particularly farmers, felt aggrieved because they had to repay loans in more expensive dollars.

More than inflation, bank panics seemed a threat. Depositors might periodically lose confidence that they could get their money. Bad loans, or rumors of bad loans, could trigger runs. Banks would be imperiled because no bank can meet the simultaneous demands of all depositors for their money—most, after all, has been lent. A run on one bank might cause runs on others. The entire banking system could collapse, depriving borrowers of loans and depositors of cash. One solution, as argued in 1873 by Walter Bagehot, the legendary editor of The Economist, was to have the Bank of England—or any central bank—act as "lender of last resort." It would lend to solvent banks (whose assets exceeded their liabilities) in times of crisis. Depositors, reassured that they could retrieve their money, would leave it be.

Together, the gold standard and the lender of last resort seemed to ensure adequate financial stability. They buttressed confidence and trust. After the brutal Panic of 1907, Congress established the Federal Reserve—America’s central bank—in 1913. But the Depression destroyed the prevailing consensus. Defending the gold standard and serving as lender of last resort were at odds. The first required central banks to be stingy with money and credit; the second, just the opposite. Temporarily, the gold standard prevailed, but the social costs were too great. From 1929 to 1933, two-fifths of U.S. banks failed. Ultimately, all advanced societies abandoned the gold standard. In 1933, Congress created deposit insurance; that would be the first line of defense against panic. Banks also would be strictly regulated and examined; banks engaging in shoddy or fraudulent practices would be shut. That was a second line of defense. And finally, the Fed could still be lender of last resort. That was a final defense.

In post-World War II America, these defenses seemed to have solved the problem of confidence and trust for good. True, there were occasional bank failures and stock market fluctuations. But these were seen as isolated events that did not impugn the system’s overall integrity. Hardly anyone worried about financial panics. They seemed relics of a bygone era.


The 2008 Slump

We know now that this optimism was an illusion that helped foster the present crisis. Since the late summer of 2007, we’ve experienced a worldwide credit implosion that has depressed production, employment, stock prices, and confidence almost everywhere. Taking financial stability for granted, money managers, bankers, traders, government officials, and ordinary investors did things that destroyed financial stability.

The standard story of how this occurred is well-told by Ferguson, whose book was completed in mid-2008 after the housing crisis hit, and by Nobel Prize-winning Princeton economist and New York Times columnist Krugman, whose 1999 book was newly updated and published in December. The debacle starts with so-called "subprime" mortgages that were extended to borrowers with weak credit histories, low incomes, or both. These subprime mortgages were then bundled into various complex bonds—including "collateralized debt obligations" (CDOs)—that were sold to investors, who bought various "tranches" (or segments) of the mortgages’ cash flows. Investors in the safest tranches had the first claim on mortgage payments, so they got the lowest interest rate but had the highest probability of being paid. Investors in lower tranches got just the opposite—a higher interest rate but more exposure to losses if borrowers defaulted.

The marketing of subprime loans was often sleazy. "Subprime lending hit Detroit like an avalanche of Monopoly money," writes Ferguson. "The city was bombarded with radio, television, direct-mail advertisements and armies of agents and brokers, all offering what sounded like attractive deals." Credit standards and loan documentation deteriorated. Some loans, later called NINJA—meaning borrowers had "No Income, No Job, or Assets"—were fraudulent. Still, these loans moved briskly along the financial assembly line—bankers or mortgage brokers made loans; the loans were sold to investment bankers who "securitized" them into bond-like securities; rating agencies like Moody’s and Standard & Poor’s graded the different tranches, allowing them to be sold to investors—banks, pensions, hedge funds—who thought they knew what they were buying.

They didn’t. Ratings proved optimistic. When subprime borrowers began defaulting, a chain reaction ensued. Banks and other investors suffered large losses. To cover the losses, they had to sell other financial assets, or raise new capital. Selling other stocks and bonds drove down their prices, creating more losses for the entire system and generating a larger need for capital. In addition, many banks, investment banks, and hedge funds had relied heavily on borrowed money—"leverage," in financial jargon. At some investment banks, leverage ratios exceeded 30-to-1: there was $30 of borrowed money for every $1 of capital. As losses mounted, lenders (often other banks and investment banks) grew increasingly skittish about renewing their loans. That intensified the pressure to sell assets. The sturdiness of this jerry-built structure of interconnected loans and credits depended on trust and confidence, but trust and confidence were rapidly eroding.

Government tried to bolster confidence through injections of credit and capital. These efforts only partially succeeded. The Bush Administration engineered the rescue of the investment bank Bear Stearns in March 2008. It did not rescue Lehman Brothers in mid-September. That decision created more losses, deepening mistrust and worsening the crisis. The subsequent $700 billion Troubled Asset Relief Program (TARP) added money to the system but not enough to restore confidence. All the financial setbacks weakened the real economy of production and jobs. Suffering huge losses on stocks and homes, American consumers curbed spending. Securitized lending for homes and vehicles fell dramatically. Other countries felt the effects through lower exports to the United States and declines in their financial markets. Global investors sold worldwide, not just in American markets.


Scapegoating the Crisis

Though complex, this "deleveraging" resembled an old-fashioned bank run. Lenders suddenly hoarded cash in the face of growing losses and threats to their own sources of credit. The usual explanations for the crisis—greed, herd behavior, and stupidity—are accurate, up to a point. All along the financial supply chain, mortgage bankers, investment bankers, and rating agencies collected hefty fees and passed the risk on to someone else. Quick profits substituted for independent judgment. Because everyone was doing it, it seemed okay. But why did all these people—many of them very smart—succumb so easily? It had been almost eight decades since a similar financial collapse had occurred. During these decades, greed, herd behavior, and stupidity hadn’t taken a holiday.

The standard view is that, since the 1980s, government’s relaxed regulation of financial markets had permitted reckless behavior that otherwise would have been restricted. Securitization of hedge funds and investment banks in the 1990s created a "shadow banking system"—a parallel network for channeling investment and credit—that was largely unregulated. As Krugman puts it:

As the shadow banking system expanded to rival or even surpass conventional banking in importance, politicians and government officials should have realized that we were recreating the kind of financial vulnerability that made the Great Depression possible—and they should have responded by extending regulation and the financial safety net to cover these new institutions.

On paper, enlightened regulators might have averted the crisis. Mortgage bankers and brokers could have been prevented from making abusive, unrealistic loans. Investment banks and hedge funds could have been limited in their leverage. Rating agencies could have been better supervised. But all this is hindsight. The unstated—and unrealistic—assumption is that regulators would have spotted financial vulnerabilities that their private counterparts missed. Two bits of evidence suggest that this is wishful thinking. First, regulators didn’t prevent subprime blunders at the most heavily regulated financial institutions, commercial banks. Second, regulators at the Securities and Exchange Commission were explicitly warned about the Bernie Madoff swindle and still couldn’t find it.

It’s doubtful that government regulators are smarter or better informed than private bankers and investors. True, they have a different mandate and face different incentives: not profit maximization and self-enrichment, but crisis-minimization and bureaucratic power, prestige, and independence. But they are not miracle workers. Chances are that they, too, would not have defused the emerging crisis. Free-market ideology is a convenient explanation and scapegoat for the crisis. But it does not really explain what happened; Ferguson and Krugman don’t get to the crux of the matter.


Mistaking Profits for Wisdom

People are conditioned by their own experiences. With hindsight, we know that investors, traders, and bankers engaged in reckless risk-taking that created economic and financial havoc. But while this dangerous speculation flourished, its participants mostly thought that the economy and financial markets had become safer. The paradox is that, believing the world was growing less risky, they took actions that made it more risky.

In some ways, their self-deception was understandable. By many indicators, the economy and financial markets seemed remarkably tranquil. Since the early 1980s, the economy had suffered only two modest recessions, those of 1990-91 and 2001, each lasting only eight months. Though job creation was sometimes sluggish, peak monthly unemployment during these decades reached only 7.8%, well below the monthly highs of the 1970s (9%) or the early 1980s (10.8%). Even after the dot-com speculation of the late 1990s and the September 11 attacks, the economy had not gone into a deep slump. The business cycle seemed tamed, if not conquered. Economists called this improvement the Great Moderation.

For Wall Street, these years were a bonanza. As interest rates dropped, investors moved into stocks. In 1982, the Dow Jones Industrial Average itself averaged 884. By 1989, this was 2,509; by 1999, 10,465. Bond prices rose, because interest rates and bond prices are mirror images: lower rates mean higher prices. In 1982, AAA-corporate bonds carried rates of nearly 14%; by 1999, they were down to 7%. On both stocks and bonds, investors earned fabulous profits, year in and year out. Falling interest rates also boosted housing prices, because buyers could afford to pay more for homes. In 1981, interest rates on 30-year fixed mortgages averaged nearly 15%; by 1999, they were down to 7%. Existing homeowners enjoyed huge windfalls in higher prices.

Everything seemed less hazardous and more predictable. In many markets, "volatility" declined. As a financial term, volatility measures typical swings in prices—of stocks, bonds, foreign exchange. Higher volatility signifies greater risk; traders don’t know what prices should be. Less volatility suggests less risk. By 2004, volatility in financial markets had dropped sharply. Everyone was aware of it. Risk seemed in retreat. Governments took note. A 2006 study published by the Bank for International Settlements, whose members are government central banks, suggested that the improvement might be "permanent." The reasons included the growth of sophisticated money managers ("well informed agents") and new securities ("risk transfer instruments") that permitted more hedging. Ironically, these would later be cited as causes of the financial crisis.

If risk had retreated, then once-dangerous practices were safer. Investment banks and hedge funds could assume more leverage (which improved profitability) because volatility (threatening big losses) had declined. Lending standards for mortgages could be relaxed, because even if borrowers defaulted, the relentless rise of home prices would protect lenders against losses. Foreclosed homes could be sold for more than the value of the loan. So, all manner of adventurous behavior was rationalized. Carelessness and complacency were made respectable, even as greed and herd behavior were indulged. In Congress, Democrats pushed the giant government-created mortgage lenders Fannie Mae and Freddie Mac to expand credit for poorer borrowers. Investment houses created and marketed new securities. On Wall Street, there developed a culture of ostentatious, often obnoxious self-congratulation. Some of its wealthiest practitioners assumed airs of superior insight, mistaking profits for wisdom.


Too Much Success

What virtually everyone overlooked was that much of this bonanza was the result of good luck, not greater financial acumen. It was the consequence of falling inflation, one of the momentous (if poorly appreciated) economic events of our time. From 1979 to 1989, consumer price inflation dropped from 13.3% to 4.6%; by 2001, it was 1.6%. Interest rates followed inflation down, because rates reflect an inflationary component. Lenders want to be compensated for the erosion of their money. As rates dropped, stock prices, bond prices, and real estate prices rose; investors shifted out money from savings accounts and money market funds to stocks. Economic expansions lengthened because high inflation had been destabilizing. Consumers borrowed more and spent more, because they counted some of their new stock and housing wealth as saving. Stronger consumer spending bolstered America’s economy—and the world’s, too, because Americans bought vast amounts of imported goods.

It is hard to argue that the defeat of double-digit inflation, engineered by Federal Reserve chairman Paul Volcker and President Ronald Reagan in the early 1980s, was a bad thing. It was the fundamental cause of the long economic expansions of the 1980s and ’90s. Falling inflation created "virtuous circles" for both financial markets and the "real economy." But, perversely, it also led to bad consequences, because its great benefits induced economic imbalances and beliefs that were ultimately self-defeating. The great profits made in financial markets gave money managers, investment bankers, and analysts an exaggerated sense of their own skills and understanding. Long expansions and shallow recessions encouraged lenders to make loans to weaker borrowers. In 2005, only 3% of subprime mortgage borrowers were in default (by late 2008, the figure was 13%).

Given the initial rise in stocks and home prices, households could borrow more. But they could not endlessly increase the ratio of their debt-to-income—which is what happened, in part because lending standards became more lax. Americans could buy more imports, but trade imbalances based on a "strong" dollar that overpriced U.S. exports and under-priced imports could not grow indefinitely without making some countries like China and Japan too export dependent. Because they were so reliant on Americans’ ever-rising indebtedness to buy imports, the structure of the world economy became dangerously unstable. And the "strong dollar"—the linchpin of the entire system—would not have existed without the low inflation that buttressed faith in the dollar’s purchasing power.

What this suggests is that prolonged prosperity was the underlying cause of the great financial meltdown. Too much success bred failure. Overcoming high inflation was a triumph, but the ensuing prosperity warped private behavior and public policies in ways that undermined prosperity. Money managers, lenders, and many ordinary Americans were lulled into a false sense of security, control, and optimism. So were government officials. After the dot-com bubble and 9/11, the Federal Reserve cut short-term interest rates to 1%. Such a move was possible only because the Fed was a credible anti-inflation fighter. With modest inflationary expectations, low interest rates didn’t cause price increases. Cheap credit softened the recession but also exacerbated the housing bubble and financial speculation. Riskier borrowers, at home and abroad—including financial institutions—got loans. Too much trust and confidence destroyed trust and confidence.


Balancing Markets and Regulation

Modern, advanced democracies are dedicated in part to the delivery of as much prosperity as possible to as many people as possible for as long as possible. The troubling implication of the current crisis is that this promise is itself a source of instability. Behind the promise lies the presumption that economic and financial knowledge have improved sufficiently to allow governments to supervise and manage the financial system and the larger economy. We had supposedly gone beyond the era of inevitable "booms and busts." The advance in knowledge meant that governments could legitimately be held accountable for economic performance. In a general sense, this will surely continue. The promise won’t be revoked, and the presumption won’t be repudiated. If some policies don’t succeed, others will be proposed. But the innate human tendency to overdo things suggests that the very striving for a perpetual, ever-improving prosperity creates its own booms and busts.

The present crisis is evidence of this maddening interplay. What defines today’s crisis is that it originated in the behavior of households and financial markets, which came to rely on too much debt, and in the lopsided international trade imbalances that were inherently unstable. Whenever the resulting prosperity seemed threatened, government—mostly through the Federal Reserve—moved aggressively to extend and prolong it. The initial success of these policies fed the illusion that financial instability had been contained and the Great Moderation was an enduring feature of our system. As these assumptions subconsciously spread, ordinary Americans, businesses, and investors acted increasingly in ways that made the assumptions false.

The news is sobering for ideologues of all varieties. For those who place great faith in "markets," the lesson of the present crisis is that they are sometimes given to destructive instability and, though they may ultimately self-correct, the wild swings—either up or down—may involve such huge social costs that no democratically-elected government could watch passively and wait for them to play out. For those who believe in the virtues of government regulation and government intervention, the lesson is that too much intervention to produce "sustained growth" achieves at best pyrrhic victories: temporary gains from longer expansions that are followed by deeper, longer, more punishing slumps.

There is, it seems, no self-evident "happy medium," no utopian mix of market power and government power that will achieve perpetual expansion. It might be better to tolerate more frequent, milder recessions and financial setbacks than to strive for some superficially more appealing but unattainable ideal. But just what that mix would be and whether it would be politically acceptable are hard to know. The fact that so much economic activity now involves international flows of goods, services, and money compounds the difficulty. These questions have not inspired much rigorous thinking, in part because people are preoccupied by the present crisis and in part because politically attractive solutions seem hard to imagine. The financial meltdown has led to an intellectual meltdown.

Peter Robinson consults Claremont Review of Books editor Charles R. Kesler to understand the roots of liberalism. To explain where Obama’s agenda comes from, Kesler shows how liberalism established itself in three distinct stages.

American conservatism, according to John Judis, has "slipped back into the chaos and impotence that prevailed" before National Review was launched in 1955. Judis, a careful though not neutral observer of all things conservative, reported in the New Republic, "Conservatives’ repudiation of Bush is part of their own self-denial. By pretending that he is entirely separate from them, they can delude themselves" that his unpopularity is not theirs.

Conservatives at the dawn of the Obamerican Century may be comforted to learn that Judis wrote this obituary in 1992, one Bush presidency and half an election-cycle before Republicans won congressional majorities that would last for 12 years. Lexis-Nexis is pitiless to writers who confidently explain how yesterday’s election will shape the next decade’s politics. Barry Goldwater "has wrecked his party for a long time to come," James Reston assured his New York Times readers in November 1964, before that wrecked party won 5 of the next 6 presidential elections. Perhaps, then, the reports of conservatism’s death are as greatly exaggerated as the ones about Mark Twain’s.

On the other hand, Twain did eventually die. A political movement is not mortal in the same way as a man, but "everything that had a beginning must have an end," according to David Frum. A month after the 2008 election he reflected on William Rusher’s The Rise of the Right (1984) in an online essay:

While political conservatism is founded upon deep and enduring truths, political conservatism itself is a political movement that arose in response to certain conditions and that must fade with those conditions. In the end, political conservatism’s core insights will cease to belong to any one political party, and be integrated into the shared history of the American people, part of the historical background from which new politics and new coalitions will arise.

The feeling that the lamps are being turned out is not unique to this election cycle. Liberals contemplated the prospect of a long internal exile after 1972, 1984, and 2004. Conservatives did the same after 1964, 1976, and 1992. A subsequent election or two proved many of these fears to be overwrought. It’s always tempting to mistake what’s vivid for what’s important, to say "this time it’s different" about the many transitory, non-defining elections that turn out to be not all that different.

Again, however, the fact that historic importance is wrongly ascribed to most elections does not prove it cannot be rightly ascribed to some. Perhaps 2008 was different, and conservatives’ forebodings about when or whether they’ll govern again are well-founded.

Muddling Through

Many Republicans are now saying what the Outs always say after a bad election: how do we get back In? (The conservative movement is distinct from the Republican Party, but for the imaginable future there is no feasible way for the movement to succeed while the party fails.) Their argument is the mirror image of the one Democrats conducted throughout the Reagan era: do we need to adhere faithfully to our party’s orthodoxy, and overcome voters’ misgivings about it (and us) by advocating our central goals more passionately? Or do we need to accept that the voters are never going to embrace some of those goals, and alter or abandon them?

In confronting this choice, Democrats mostly muddled through. The party’s commitment to gun control is quieter and less insistent than it was 30 years ago. Democrats have learned to speak sternly about crime, and respectfully about the military. Most congressional Democrats voted against the 1996 welfare reform bill, but a Democratic president signed it. For 12 years, Democrats seemed to accept that abolishing Aid to Families With Dependent Children meant that the government had negotiated a new deal between taxpayers and the poor that was more successful and equitable. Upon gaining simultaneous control of the House, Senate, and White House for the first time since 1994, however, the Democrats of 2009 waited all of four weeks before eviscerating the 1996 law in the fine print of the stimulus package.

Abortion was never so ambiguous. The party tolerates pro-life Democrats like Senator Robert Casey of Pennsylvania in states and districts that would be inhospitable to a pro-choice alternative. Such Democrats are made to understand, however, that they cannot change the party platform’s unqualified commitment to Roe v. Wade (1973), cast any judicial confirmation votes that might increase the possibility of Roe being overturned, or even daydream about a spot on the national ticket.

On the broadest domestic policy question, the era of Big Government being over is over. (Conservatives can draw some equivocal solace from knowing that the era of Big Government being over never really got started.) By the end of 1997, the first year of his second term, Bill Clinton was on the verge of embracing entitlement reforms that would have moved Social Security and Medicare in the direction of solvency and privatization, according to historian Steven Gillon’s new book, The Pact. Some prominent Democratic senators, including Bob Kerrey, John Breaux, and Daniel Patrick Moynihan, were prepared to govern along the same lines. After the Monica Lewinsky story broke in January 1998, Clinton’s aspirations shrank from building a history-book legacy to serving out his elected term. He was left dependent on the good will of ideologically implacable Democrats, who quickly scuttled any consideration of private accounts, reduced benefits, or means testing. There the matter has rested ever since.

Traditionalists vs. Reformers

For conservatives, the coming argument about core principles will pit "Traditionalists" against "Reformers," according to David Brooks of the New York Times. Traditionalists, he says, "believe that conservatives have lost elections because they have strayed from the true creed. George W. Bush was a big-government type who betrayed conservatism. John McCain was a Republican moderate, and his defeat discredits the moderate wing." The Traditionalists, Brooks says, include Rush Limbaugh, Sean Hannity, and Grover Norquist of Americans for Tax Reform. They’re convinced the cure for the problems of conservatism is more conservatism: "Cut government, cut taxes, restrict immigration. Rally behind Sarah Palin."

Reformers, by contrast, believing that "American voters will not support a party whose main idea is slashing government," recommend "new policies to address inequality and middle-class economic anxiety." They "tend to take global warming seriously," according to Brooks, not only on the merits, but in the belief that conservatives "cannot continue to insult the sensibilities of the educated class and the entire East and West Coasts." The most prominent Reformers are writers. Brooks’s list includes: David Frum, author of Comeback: Conservatism That Can Win Again; Ross Douthat and Reihan Salam, co-authors of Grand New Party; Ramesh Ponnuru of National Review; and Yuval Levin of the Ethics and Public Policy Center.

The Traditionalist-Reformer boundary line is not clearly marked. Not only do Reformers disagree with one another on many questions, but their differences push some closer to and some farther from the Traditionalists. Frum, for example, urges conservatives to take obesity seriously as a public health problem. Ponnuru doubts that "a citizen’s weight is any of his government’s business," since the conclusion of that argument would mean "there is no principled reason to reject compulsory calisthenics." He chides Frum for leaving behind not just the "conservative consensus," but "conservative habits of mind." Frum, conceding that all the policy options for obesity may turn out to be worse than the problem, insists on the broader point: "[W]e cannot allow ourselves to be scared away from creative thinking about new problems by ideological policemen." Even if it is true that conservatism rules out any ambitious policy measures to reduce obesity, Frum recently remarked, that tells us more about the limits of conservatism than the unimportance of obesity.

Reaching a Majority

Both traditionalists and reformers confront the Outs’ essential problem in a two-party democracy: how do we get back to 50.1%? Part of addressing the question involves choosing between a half-full or half-empty interpretation of the most recent election. The Republicans’ half-full explanation is that winning 46% of the presidential vote in 2008 was not bad, all things considered. Those things included the unpopularity of a Republican president whose second term comprised 208 bad weeks, Senator McCain’s strained relations with his party’s conservative base, Barack Obama’s funding advantages and forensic skills, and the credit crisis and market crash seven weeks before Election Day.

A party that garners 46% of the vote under such dire circumstances could, conceivably, win a majority under ordinary ones. The half-full explanation is especially appealing to Traditionalists: if conservatism has so much residual support, then it doesn’t need to be re-thought, just presented more confidently and effectively to an America that remains "a center-right nation," according to post-election analyses by Karl Rove, National Review’s Rich Lowry, and others.

Ronald Brownstein of the National Journal laid out the most bracing half-empty interpretation of 2008. He divides the American electorate into six demographic groups: 1) whites who have not graduated from a four-year college; 2) whites who have; 3) blacks; 4) Hispanics; 5) Asians; and 6) other minorities. By Brownstein’s arithmetic, McCain would have won a 50.2-to-47.9 victory over Obama-if the electorate in 2008 had been apportioned among those six groups exactly as it was in 1992. McCain did best among whites without college degrees, getting 58% of their vote. In 1992 such voters accounted for 53% of the electorate, but were only 39% by 2008. Whites with college degrees were 35% of the total electorate in 2008, as they had been in 1992. Obama got 47% of their votes. The smaller proportion of working-class white voters corresponded to the larger proportion of minority voters. Blacks went from 8% of the electorate in 1992 to 13% in 2008; Hispanics from 2% to 9%; and Asians and other minorities from 2% to 5%.

Unless America’s demographic future veers off the path it has followed the past 16 years, the Republicans’ prospects will worsen from daunting to hopeless. Brownstein applies the 2008 election results for his six groups to the electorate demographers expect in the year 2020. The increasing proportion of non-white voters turns the Republicans’ 7-point deficit in 2008 into a 14-point landslide defeat.

The problem, which looms larger in the Reformers’ minds than the Traditionalists’, is how to effect a net addition in the number of voters for America’s more conservative party. Winning new votes is not rocket science. Winning new votes without losing old votes can be.

George Bush and John McCain, looking at the same demographic trends as Brownstein, concluded after 2000 that the GOP could not be viable without being electorally competitive among the growing cohort of Hispanic voters. That was plausible, as was their decision to make immigration reform a big part of the Republican sales pitch to Hispanics. There was no place in their equations, however, for determined opposition to more immigration from the GOP base, especially white voters without college degrees, the ones most likely to be competing with Mexican immigrants for jobs at restaurants, factories, and construction sites. Confronted with a rebellion by the party’s core voters, Bush and McCain reluctantly let the immigration issue drop in 2007 after it became clear that any congressional majority for their proposal would be overwhelmingly Democratic.

"There will not be an Hispanic future for the GOP for years and years," Frum wrote in a newspaper column the day after the election. "American Hispanics are poor-and they vote majority Democrat for the same reasons that poor people of all races vote Democratic." Obama got 67% of their votes, despite McCain’s ardent courtship. Black voters have been beyond the GOP’s reach for almost half a century. Barack Obama received 95% of their votes, according to Brownstein. Asians and other minorities? Too small a portion of the electorate to bail Republicans out-and they gave 62% and 66% of their votes, respectively, to Obama in 2008.

New Votes or Core Votes?

For the foreseeable future, then, republicans will have to get more votes from whites. The question is whether the party’s best bet is to grow wider or deeper. Frum thinks the GOP has to do better with college graduates. "College-educated Americans have come to believe that their money is safe with Democrats-but that their values are under threat from Republicans," he says. Reassuring them will require saying some different things, about issues that include abortion and the environment, and saying some things differently. Frum wants a GOP that is "less overtly religious, less negligent with policy, and less polarizing on social issues." Michael Barone agrees that Republicans can and must do better with upscale voters, an effort that will require, among other things, "downplaying cultural issues." For example, he says, "the days of winning votes by opposing [same-sex marriage] are nearing an end."

Douthat and Salam think the GOP should concentrate on doing even better with its core voters, whom they call "Sam’s Club Republicans." (The subtitle of Grand New Party is How Republicans Can Win the Working Class and Save the American Dream.) Douthat and Salam are, nevertheless, Reformers rather than Traditionalists. They think Republicans must approach working-class voters with tangible benefits, not just cultural solidarity and anti-government populism. Douthat urges Republicans to talk to those voters "about the famous ‘kitchen table’ issues-public education and transportation, crime and health care costs-and [try] to expand the definition of what it means to be ‘pro-family’ without abandoning the GOP’s core pro-life convictions."

To that end, Douthat and Salam endorse Ramesh Ponnuru’s proposal to: a) increase the tax credit for each dependent child from $1,000 to $5,000; and b) make the credit especially valuable to working-class families by letting taxpayers use it to offset income and payroll taxes. The Ponnuru plan is revenue-neutral; its tax cuts equal its tax increases, which include ending the federal deduction for state and local taxes. It is, then, explicitly redistributive; his plan "would create winners and losers," Ponnuru says. The losers would be more prosperous taxpayers, especially those who never started or have finished raising families.

Douthat and Salam endorse similar policies to help working-class families with health insurance, as well as wage subsidies that would "help less-educated single men with low-paying jobs make ends meet, thereby making them more desirable marriage partners." The objective is to make conservatism attractive to a working-class larger than the cohort of those without college degrees. As Douthat argued in his Atlantic Monthly blog, many alumni of Youngstown State will have more in common with graduates of community colleges and technical institutes than with members of the "mass upper class" who spent four years at Amherst on their way to Wharton.

I think building a coalition of social conservatives and social moderates from the middle of the income and education distribution makes much more political sense than trying to hold together a coalition of social conservatives from the middle of the distribution and social liberals from the upper end. Joe the Plumber and Joe the Office-Park Employee make much more plausible political bedfellows than Joe the Plumber and Joseph the Hedge Fund Guy.

The Reformers disagree on the new conservative agenda, and the makeup of the coalition it will galvanize, but agree that the Traditionalists, prepared to wait for the spontaneous political revival of Conservatism 1.0, are in denial. 1980 was a long time ago, say Douthat and Salam. "Every Republican wants to be Ronald Reagan running against tax-and-spend Jimmy Carter, but Jimmy Carter has long since left the building." As a result, Republicans "are losing the argument over taxes and spending."

1972 was even longer ago, Frum points out in Comeback. "Republicans have been reprising Nixon’s 1972 campaign against McGovern for a third of a century. As the excesses of the 1960s have dwindled into history, however, the 1972 campaign has worked less and less well." He asks, "How many more elections can conservatives win by campaigning against Abbie Hoffman and Bobby Seale?" The time warp isn’t helpful. "If we conservatives and Republicans want to win again," says Frum, "we have to offer the American voter something fresh and compelling-answers to the problems of today, not the problems of the era when disco ruled."

The Reformers want the Traditionalists to face some hard truths and make some hard choices. After the disastrous elections of 2006 and 2008, that advice is manifestly superior to sanctioning complacency.

Conviction Politics

But it’s advice the reformers need to take as well as give. In the Reformers’ books, articles, and blogs, good government always turns out to be good politics, and vice versa. Conservatism 2.0 can win elections while steadily making America more prosperous, just, and free.

Ponnuru and Frum disagree about abortion, for example. Ponnuru thinks retreating from the GOP’s pro-life stance will offend more voters than it attracts, while Frum thinks refusing to modify the party’s position on abortion will alienate larger and retain smaller numbers of voters over time. Leaving aside the question of which one is right, it’s noteworthy that each is confident that his preferred policy outcome is also the sound, vote-maximizing political tactic. Reformers, who find wise governance corresponding so closely to smart politics, would do well to extend some patience to Traditionalists, who struggle to reconcile them.

Conservatives, the defenders of American capitalism, have welcomed the application of business techniques and terminology to national politics. Google "Republican brand," for example, and your laptop will melt. Business is amoral in a way politics must not be, however. In business, if the price of corn is high we plant corn, and if wheat is high we plant wheat. If both are low and stay there, we sell the farm and write Game Boy software.

By contrast, as Margaret Thatcher said and showed, the only politicians deserving admiration are "conviction politicians." Successful, compelling, and shrewd ones like Thatcher and Reagan seize their historical moments to render their convictions more popular and politically consequential than they were before. Such leaders and moments are rare, however, and cannot be summoned just because a movement bound together by a cluster of convictions needs them.

While waiting for the next exceptional leader who can secure majorities for their convictions, conservatives-both Reformers and Traditionalists-must understand their situation without illusions. If the world is as congenial as the Reformers hope, doing the right thing will regularly resolve into doing the popular thing. Each additional wise and just policy proposal will make the conservative coalition that much bigger and more durable.

If it turns out that the tensions between governing wisely and winning elections are more formidable, then the Traditionalists’ inclinations deserve some respect. Their strategy for future conservative victories is, indeed, hopeful rather than plausible. But among the causes of that disconnect is something more admirable than sloth, cowardice, dogmatism, or denial.

The Art of Compromise

The traditionalists’ reluctance to embrace the Reformers’ fresh and compelling ideas, or offer some of their own, reflects an inherently conservative disposition to resist the Zeitgeist rather than accede to it. Politics is the art of compromise, and prudence may well dictate that conservatism should compromise with realities it cannot change and forces it cannot defeat. But compromising includes knowing when not to compromise, knowing which differences cannot be decently split. As political scientist Martin Diamond wrote, men may prefer to "go down fighting" rather than settle for a "morally disgusting" compromise.

Thus, conservatives who contemplate the smoldering wreckage after the 2008 election and say, "This time is different," may be right. Conservatives don’t just have to devise a strategy to gain a majority, as they did in 1965, 1977, and 1993. They have to wonder, based on the entire record of the past 28 years, whether there is anything particularly conservative they’ll be able to do if they secure that majority.

Conservatives disagree about what, exactly, they exist to conserve. University of Virginia politics professor James Ceaser has identified four different "foundations" for American conservatism: 1) Traditionalism, in the sense it was used by Russell Kirk to extol Edmund Burke; 2) Libertarianism, and its assurance that "spontaneous order" will emerge from uncoerced human action; 3) Natural Right, the belief that human reason can ascertain universally valid principles of human conduct, such as the Declaration of Independence’s self-evident truths; and 4) Faith, the desire to resist the forces of secularization and vindicate the role of religion in shaping American culture.

Proponents of each foundation have argued with the others’ advocates for decades, sometimes esoterically, sometimes belligerently, occasionally in both ways at the same time. Despite their differences, the four foundations share an implicit premise: the conservative’s mission is to champion to his contemporaries a heritage with roots that are centuries old. If, however, the relationship between those contemporaries and that heritage has become attenuated to the point of estrangement, then the heritage will be regarded as an exotic or anachronistic option instead of a vital but neglected part of the existing order. The "conservative" would then be reaching back beyond a historical rupture, and no longer trying to conserve but to recreate or refound, an endeavor that is even more difficult and less promising.

In "My Cold War," a famous-to some, infamous-article in 1993, Irving Kristol wrote:

There is no "after the Cold War" for me. So far from having ended, my cold war has increased in intensity, as sector after sector of American life has been ruthlessly corrupted by the liberal ethos. It is an ethos that aims simultaneously at political and social collectivism on the one hand, and moral anarchy on the other. It cannot win, but it can make us all losers. We have, I do believe, reached a critical turning point in the history of the American democracy. Now that the other "Cold War" is over, the real cold war has begun.

A year later, William Kristol encouraged conservatives to embrace "a politics of liberty and a sociology of virtue" in order to wage the war his father had declared. Conservatives can point to impressive accomplishments over the past decade-and-a-half, none greater than the dramatic decline in crime rates, a problem most liberals and some conservatives considered insoluble in the early 1990s. The dark night of collectivism and moral anarchy has not descended.

It was clear even before the 2008 election, however, that the liberal ethos, by any reckoning, is more robust than it was in 1993. One measure of its strength is that conservatism’s policy victories often engender conservatives’ political defeats. The collapse of the Soviet Union in 1991 paved the way for Bill Clinton’s election in 1992, in the same way that the success of the surge in Iraq in 2007 took the war off the front page in 2008, and made it impossible for John McCain to gain electoral traction as its chief advocate. The tax reduction and simplification achieved by the tax reforms of 1986 cleared the canvas for liberals to immediately begin advocating new increases and complexities. Even as the memory of the great crime wave from 1960 through 1994 has been effaced by the expectation of safe streets over the past 15 years, liberal activists and writers are laying the groundwork for a campaign against America’s "scandalously" high incarceration rates. Their "logic" is that safe streets have rendered full prisons unnecessary-rather than full prisons having rendered safe streets possible.

Conservatism or Victory?

In short, America’s political division of labor finds conservatives cleaning up liberals’ messes, and liberals sweeping into the newly tidy spaces to start making new messes. If that’s true, what is to be done?

We can begin by saying that the conservative project has a kind of built-in cognitive dissonance: conservatives obey the imperative to fight for their principles while expecting defeats to be bigger and more numerous than victories. The psychological armor that protected the National Review conservatives of the 1950s was their belief that being denounced as cranks and menaces for asserting the political equivalent of 2 plus 2 equals 4 was a badge of honor and a source of great, iconoclastic fun. William F. Buckley, Jr., in particular demonstrated through his public persona as much as his arguments, how to be a simultaneously fierce and happy warrior against opponents who were much likelier to have the Times than the truth on their side.

The new Reformers’ effort to fashion a conservatism that can win again is deeply earnest, but could avail itself of a bit of the spirit of standing athwart history yelling Stop, instead of debating how and when to seize the future. Without that attitude, the Reformers will be tempted either to define conservatism down, or to define victory down.

Defining conservatism down means giving the benefit of the doubt to every policy proposal that pushes the conservative coalition closer to, and finally back above, the magic 50% line. The practice of conviction politics in a democracy, by contrast, requires the mission to define the coalition, rather than be defined by it. The Reformers Brooks cites seem cognizant of this problem. Frum, for example, laments the "tremendous resistance to any push for change" in the conservative rank-and-file, but points out that the change he advocates is in conservatism’s method more than its content. "What our party needs is not more ‘moderation.’ It is more empiricism." The danger is that the Reformers’ audience, including their politically ambitious readers, will be too eager to embrace any policy idea that might win votes as "conservative enough."

Defining victory down, on the other hand, means using the probability of ultimate defeat to justify immediate capitulation, and then celebrating that surrender as evidence of refinement and perspicacity. This is the position urged by Sam Tanenhaus, whose essay, "Conservatism is Dead," appeared in the New Republic earlier this year. John Judis was right, in other words, but a prophet 16 years before his time.

As it happens, Judis wrote a biography of William Buckley 20 years ago, and Tanenhaus is completing one now. Tanenhaus’s previous book was a biography of Whittaker Chambers, who was closer to Buckley personally and philosophically than politically. The two friends were resolute anti-Communists in the 1950s, but Chambers declined Buckley’s initial invitation to join National Review. "He sympathized with the magazine’s opposition to increasingly centralized government," according to Tanenhaus, but believed "that New Deal economics had become the basis for governing in postwar America, and the right had no plausible choice but to accept this fact," rather than pursue a "futile" challenge to it.

This debate, according to Tanenhaus, is the "story of American conservatism." It pits "those who have upheld the Burkean ideal of replenishing civil society by adjusting to changing conditions" against "those committed to a revanchist counterrevolution, the restoration of America’s pre-welfare state ancien regime." If Tanenhaus considers himself a conservative in any sense, he clearly does so in the first, not in the straw-man alternative he constructs. He approvingly quotes Chambers:

Those who remain in the world, if they will not surrender on its terms, must maneuver within its terms. That is what conservatives must decide: how much to give in order to survive at all; how much to give in order not to give up the basic principles.

Besides having a somber beauty, this passage is undeniably correct. It does not follow, however, that any particular decision about how much conservatives must give to maneuver within the world’s terms is a correct or defensible one. According to Yuval Levin, the problem with Tanenhaus’s use of Chambers is that he makes "playing nice with liberals" the criterion defining true conservatism. "In this view," says Levin, "conservatism is accommodation-it is pure gradualism, with no concern for where we are gradually headed."

"I know that I am leaving the winning side for the losing side," Chambers told the House Un-American Activities Committee in 1948, "but it is better to die on the losing side than to live under Communism." Chambers died in 1961, 30 years before history would show that he had joined the winning side after all. His refusal to reckon how much of that basic principle to give up made Chambers a conservative hero.

The American Experiment

Tanenhaus admires chambers, and does not dispute the wickedness of Communism, but doesn’t believe there are any other basic principles left for conservatives to worry about or defend. "What our politics has consistently demanded of its leaders, if they are to ascend to the status of disinterested statesmen, is not the assertion but rather the renunciation of ideology," he writes. Yet he applies this standard far more leniently to liberals than to conservatives. In the era of Radical Chic, "liberals unwittingly squeezed themselves into the stereotypes conservatives had invented," according to Tanenhaus. Well, perhaps. Or, maybe, the McGovernite liberals who admired and feared a menagerie of thugs, loons, and trust-fund revolutionaries were vindicating the worst kind of stereotype-an accurate stereotype-which conservatives didn’t invent but discerned.

Be that as it may, by 2009 these disputes about liberalism and the 1960s are all bong water over the dam, Tanenhaus says. Liberals renounced their ideology "a generation ago when they shed the programmatic ‘New Politics’ of the left and embraced instead a broad majoritarianism." Now it’s time for conservatives to renounce their ideology.

Yet somehow oblivious to the post-ideological spirit proclaimed by Tanenhaus, the Pelosi Democrats stuffed every social pork-barrel project on the shelf into their $787 billion stimulus bill. Similarly, the generation-old liberal devotion to comity can easily be mistaken for something less conciliatory when it comes to the politics of abortion. As Douthat argued last year, the pro-choice idea of compromise, stipulating at the outset that Roe v. Wade and Planned Parenthood v. Casey (1992) remain the law of the land forever, is identical to the Soviet Union’s posture during arms talks: what’s ours is ours, and what’s yours is negotiable.

By the same token, the Californians who voted against same-sex marriage last November will be puzzled to learn from Tanenhaus about the broad majoritarianism of the post-ideological liberals. This expressed itself through anti-majoritarian lawsuits, filed days after the election, asking the state supreme court to declare null and void the votes of 6.3 million citizens who deliberated in good faith a public question legitimately placed before them. The liberal spirit of live-and-let-live inspired, as well, virulent protests in front of churches that opposed same-sex marriage, and the workplaces of individuals who donated a few hundred dollars to the campaign against it.

If Tanenhaus greatly exaggerates the liberal spirit of accommodation, in other words, then what he is asking of conservatives is not the reciprocal but the unilateral renunciation of ideology. The question that has "haunted" conservatism for half a century, according to Tanenhaus, is that conservatives know what they’re against, but not what they’re for. But aren’t there usually some illuminating connections between the two, as in the famous lines by Evelyn Waugh about Rudyard Kipling?

He was a conservative in the sense that he believed civilization to be something laboriously achieved which was only precariously defended. He wanted to see the defences fully manned and he hated the liberals because he thought them gullible and feeble, believing in the easy perfectibility of man and ready to abandon the work of centuries for sentimental qualms.

In the American context, our experiment in self-government is the precarious undertaking conservatives defend. Most experiments fail. America’s astounding triumphs in the past do not guarantee perpetual success going forward. Whatever their differences about conservatism’s foundations, conservatives agree that defending the American experiment more often requires opposing than accommodating liberalism.

The danger liberalism poses to the American experiment comes from its disposition to deplete rather than replenish the capital required for self-government. Entitlement programs overextend not only financial but political capital. They proffer new "rights," goad people to demand and expand those rights aggressively, and disdain truth in advertising about the nature or scope of the new debts and obligations those rights will engender. The experiment in self-government requires the cultivation, against the grain of a democratic age, of the virtues of self-reliance, patience, sacrifice, and restraint. The people who have this moral and social capital understand and accept that there "will be many long periods when you put more into your institutions than you get out," according to David Brooks. Instead, liberalism promotes snarling but unrugged individualism, combining an absolute right "to the lifestyle of one’s choice (regardless of the social cost) with an equally fundamental right to be supported at state expense," as the Manhattan Institute’s Fred Siegel once described it. Finally, the capital bestowed by vigilance against all enemies, foreign and domestic, is squandered when liberals insist on approaching street gangs, illegal immigrants, and terrorist regimes in the hopeful belief that, to quote the political scientist Joseph Cropsey, "trust edifies and absolute trust edifies absolutely."

Conservatives have no guarantees that they will be able to save the American experiment from those who cavalierly dissipate the capital required to sustain it. They can only struggle to prudently reconcile the experiment’s deepest needs with the exigencies posed by today’s circumstances and threats. If that reconciliation ultimately requires nothing short of morally disgusting compromises that give up basic principles, the conservative will, instead, cheerfully commit to doing his duty for the duration, fully expecting to die on the losing side.