Tom Easton, American Finance Editor at the Economist, just did an Ask Me Anything at Reddit about what a big honking mess the U.S. is financially. A few exchanges follow.

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Question:

You’ve commented that the US economy is moving towards the state-run model used in China and you’ve seen the effect of that first hand. There are many people in the US who think that’s not a bad thing. Can you briefly summarize the top 3 benefits and top 3 disadvantages to this model?

Tom Easton:

The Chinese economy functions because of a vibrant semi-legal market built around companies that do not pay taxes or follow national laws. At a certain point of maturity, they come under the system and lose their vitality. This is becoming sort of true in America as well, in as much as even though companies follow laws, the laws themselves are Orwellian – all equal, but more equal for some entities then others. Ones falling into this category include the various branches of private equity companies, master limited partnerships, real estate investment trusts, and business development companies. They largely avoid paying taxes on a corporate level, and are growing components of the American economy. When they get extremely large (and perhaps they are nearing this point), pressure will lead to change (maybe). The good part of this facet of America is that allows economic dynamism. The bad part is that it is extremely unfair. That is just like what occurs in China.

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Question:

Treasury Secretary Lew–and the current Administration more broadly–recently began to promote the idea that Dodd-Frank and related Basel III capital and liquidity reforms have solved the problem of Too Big to Fail.

What are your thoughts on the metrics economists and analysts use to measure TBTF, specifically the existence of a “subsidy” in the form of cheaper debt financing as a result of implicit government support. Does the subsidy accurately measure TBTF? And if not, how can we know when we have addressed one of the core symptoms of the financial crisis?

And what do you think of the glaring holes in financial regulatory reform that the TBTF debate seems to ignore, i.e., securities financing transactions, money market funds, and other shadow banking entities.

Tom Easton:

I think the notion we have contained too big to fail is ludicrous. In many ways, during the crisis we merely shifted risks from private institutions to the government, and governments can still fail. Student loans, medicaid and social security are all structurally unsound, as are numerous large public pension plans. Nobody understands Dodd Frank, and I say this having read it, heard incoherent blather from its named authors, and spoken to numerous lawyers making a fortune from its nuances. Worse, perhaps the one uncontroversial ingredient of the financial crisis was its tie to improperly backed housing loans, and there is every indication the administration is pushing in this direction once again. Risk can not be eliminated and to suggest otherwise is to deceive. At best, it can be channeled and made more transparent. Consider one key plank of Dodd Frank: the stress test by the Fed. No one really understands what is in the test, and to the extent there is opacity, good credit will be curtailed and credit broadly will be provided by other sorts of entities that aren’t exposed to the same bureaucracy. There are already signs that it will come through companies which themselves are backed by bank, merely making the system more convoluted. The end of this questions suggests the author, bae8, clearly understands the limitations of the rules. We may have gotten the worst of both worlds – a “safety” net full of holes that nonetheless asphyxiates virtuous economic activity.

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Question:

Do you think there will be any economic repercussions down the road due to the late start young adults are having in terms of jobs, starting careers, settling down etc?

Tom Easton:

At the Economist we have meetings in the editors office. Ideas are debated and often research cited. Sometimes I feel that what I hear is exactly contrary to what I have experienced. This is one of those areas. In a meeting I attended, one of our economic writers cited a piece that said the damage caused by a delayed or adverse start to a career will cause profound long-term damage to a career, and the reverse is true as well – there are golden moments to begin work. I have certainly seem anecdotal evidence of the latter – business school graduates from the late 1940s controlled vast swathes of the American economy. That said, I found that many of the most talented, driven and open people I have encountered were hit hard early on by adverse economic circumstances. When I began my career, the most extraordinary people I encountered had lived through bitter times during the Depression. It is no secret that Apple and Microsoft were founded in the 1970s. I think the key is how miserable the person is about their late start. The more miserable they are, the happier they will be.

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Question:

What do you think is the biggest danger to the world economy that isn’t talked about in the media or intellectual circles today?

Tom Easton:

The single biggest danger is that there is no consensus, and perhaps no understanding, on underpins a viable economic system. In America, I think we are at a point where there is no agreement – and again maybe no understanding – of what defines the structure of a company, the role of the state, illegal activity, and even ownership. People often refer to the “american system” but whatever this may be is currently in great flux. That is a huge challenge to the rule of law – meaning clear demarcations of what is right and just, and what constitutes appropriate activity. The result is that there a movement toward cronyism – success is tied to who you know and the friends that can be purchased. The good news is that I believe many in America are aware of this, and it is not illegal to discuss it (untrue in much of the world) and consequently, I anticipate the emergence of better ideas and conditions.•