The recent headlines about massive layoffs, global economic downturn and how the trillions of dollars in bailouts and proposed bailouts are not considered enough by most economists. This leads one to wonder what the real solution is. But to get to the solution we must first look at the source of the problem.
Popular misconceptions point the finger at the personal greed of the wealthy or corporate America; some politicians claim the problem is a lack of government regulations and a few even claim that this is just proof of the failure of capitalism.
When we look at history we see the reality: the more an industry is regulated - the more likely its failure.
|Highly Regulated||Deregulated||Less regulated|
|Cable companies||Postal services||Education|
A clinical analysis shows that the current crisis was spawned by regulatory zeal in the 1970's to force banks to loan money to those with poor credit. Under Clinton these regulations were put on steroids to ensure that loans were given to more lenders who were unqualified and indeed were not at all likely to be able to repay. This was done under the rubric of social justice so that everyone would get a home (remember we were all celebrating the wealth of this country?). As the Reverend Wright would say, 'our chickens came home to roost', as the government solution was to ignore the problem and find creative ways to repackage the loans. When some lawmakers tried to raise an alarm they were shouted down by the same politicians that were overseeing the system. Similar scapegoating will be found in the health-care and oil businesses.
We can trace this legacy of government intervention back to the New Deal (or perhaps as far back as Theodore Roosevelt). The New Deal was a loose collection of regulations aimed to reassure the public that the Federal government was doing everything possible to end the Great Depression and provide security. A notable product of the New Deal was Social Security which is now the poster child for government programs that resemble a 'Ponzi scheme' more than a 'trust fund'. We continue to look at programs from the 'War on Poverty' to the 'Highway Trust Fund' which have also failed to deliver on their noble promises.
So then what is the solution in general and specifically to today's malaise?
Generally the answer is to unregulate wherever possible. There are certainly some cases where regulation is appropriate but the strength of our system is in a legal system that protects businesses and individuals from illegal acts (theft, fraud, etc). Coincidentally the Cato Institute has been running an ad along these lines. The history of the US as the most successful entity in modern history due to economic freedom and liberty is proven. Modern history is also littered with stories of failures of competing systems like socialism and communism.
A specific solution that suits today's context of economic stagnation coupled with regressive fuel prices is to spur energy production through safeguards to businesses that want to pursue solutions. These solutions include oil exploration, natural gas exploration; nuclear power production; and various alternative fuel source development. The greatest investments would be in oil, gas, coal and nuclear power. The restrictions on exploration and development must be lifted with legal guarantees of indemnity from government interference for a suitably long period (such as 50 years) so that investors would have manageable risk levels and expectations for returns. These industries would reignite manufacturing and production systems throughout the U.S. as well as the dependent businesses such as transportation, distribution, and services that support these.
The other side of this coin is to reduce government spending at all levels of government. Data shows that government spending is approaching 40% of our Gross Domestic Product. This huge spending produces very little economic value but consumes vast amounts of the fruits of our labors. There are plenty of complex and contradictory models to prove almost any position but let's boil it down to a simple analogy. If you are broke the last think you would do is to suggest a spending spree to solve your problem. The government needs to back off and allow the economic engine that has worked for this nation for hundreds of years to do what it is good at - produce wealth. (Not all debt is bad - most of us have mortgage debt to help us finance a home, but when you are living in a home that is far too expensive for your earning potential you can expect an ignoble end. The same principle applies to businesses that require loans to start and grow but a bank would ordinarily only lend to those deemed to have a sound way to repay those loans.)
UPDATE: A new level of pork spending from the WSJ: (hat tip to Lynn Van Note)
"Never let a serious crisis go to waste. What I mean by that is it's an opportunity to do things you couldn't do before."
So said White House Chief of Staff Rahm Emanuel in November, and Democrats in Congress are certainly taking his advice to heart. The 647-page, $825 billion House legislation is being sold as an economic "stimulus," but now that Democrats have finally released the details we understand Rahm's point much better. This is a political wonder that manages to spend money on just about every pent-up Democratic proposal of the last 40 years.