Tuesday, September 23, 2008
The bailout of Wall Street that is currently being put together will definitely not solve the financial crisis. I believe it will only accomplish two things:
1. It will put millions of dollars back into the personal pockets of Wall Street executives, and
2. It will throw hundreds of billions of dollars down a black hole
A rescue plan that actually works could, of course, be created. The problem is that it would have to be something similar to the New Deal, and that is something that is unattainable in today’s political climate. So, we will most likely have an economic crisis that will go on for quite some time, but the politicians of the near future are going to have to deal with it in one way or another, and the big question is whether it will be an Obama or McCain administration that is going to have to do it. I believe that, in the economic policy respect, the choice between these two candidates is a choice between John Maynard Keynes and Milton Friedman.
In order for a country to get out of an economic crisis, the two economists would have suggested the following:
Obama’s choice - Keynes: increase government spending, through more government jobs, infrastructure and fiscal stimulus, in order to increase demand in the economy. Do not balance the budget, and do not raise taxes
McCain’s choice - Friedman: lower taxes wherever possible. Get rid of financial regulation. Do not balance the budget. The gains that the richest people in society will get from these policies, will trickle down to everyone eventually
I base these two connections between politician and economist on the two candidates’ economic plans, and the plans are very different on a philosophical level.
Obama has stated that he wants to increase spending on infrastructure and government support for local industry, especially in the mid-west. The idea behind this, coupled with some aspects of economic protectionism, seems to be to create a more vibrant market for all goods and services, produced and consumed, here in The United States. Obama would also spend more money on government provided services such as healthcare, which would create jobs. These ideas constitute quite a radical shift away from American economic policies dating back several decades, in that the government would take a much bigger role in the economy, reliance on foreign goods for cheap merchandise would be lowered, and more non-military people would be employed by the government.
The philosophies of John Maynard Keynes were implemented in large parts of Europe that had social-democratic governments between 1950 and 1990. Generally, these countries were doing very well at this time, and prosperity grew at an unprecedented pace. At any time when there was a bump in the economic road, the government responded by spending more, lowering interest rates and sometimes devaluing its currency (to make it easier to export goods). This has often been described as pushing the accelerator and brake pedals at the same time. The governments also had large budget deficits. By the end of the 1980:s however, the system came crashing down. It simply was not sustainable to be spending so much while running large budget deficits if the economic environment was not very, very advantageous. It must be pointed out, however, that these policies also completely eradicated poverty and provided free healthcare, pensions and free education for everyone in these countries.
John McCains’s economic plan does not provide a radical shift in economic policy. It calls for lower taxes for high income individuals and corporations, less government spending and less regulation. The plan offers almost nothing new and barely even an update of the current policies. Anyway, the McCain plan is intended to free up money for corporations and wealthy individuals, so that this money can be spent throughout the economy in order to create jobs and prosperity. Recently the McCain plan has evolved slightly, and now includes a focus on personal responsibility for decision-makers in the economic administration. McCain wants to fire many of the people in the Treasury, and appoint new people.
The policies of Milton Friedman have a much longer history. The reason for that is that they’re not so much policies, as they constitute the absence of policies. As such, any society without any control, such as a stone-age society, could arguably be called a Friedman economic system. Friedman believed that economies should be left alone, without regulation or intervention, and that the market would solve the problems in the economy itself. This is called “laissez-faire”, which means, “leave it be”. The only large country that has ever had a major commitment to Friedman economics is The United States. This country started to move away from most aspects of other economic policies in the early 1970:s, and after George W. Bush’s first term, the transformation was almost complete. In The United States, the market is seen as being able to provide everything, including things such as healthcare, infrastructure and education, without the help of the government. I believe the current economic crisis is a direct result of Friedman economics, so I obviously don’t think that we should continue down this path.
To sum up a few things:
Orthodox Keynesianism does not work because it leads to reckless government spending and budget deficits, and that is not sustainable in the long run. It has been tried in Europe for many decades, but has been abandoned.
Orthodox Friedman economics also does not work because it turns the entire economy into a Las Vegas casino, while a lot of people never see any of the benefits. It has been tried in The United States for a long time, and it will become painfully evident very soon that it does not work.
What countries in Europe figured out about 15 years ago was that what you absolutely need is a mixed economy that is very fiscally stringent. In most parts of Europe, it is illegal for the government to not balance the budget, and to have more than a set amount of government debt. A modern country today, absolutely needs to do the following things:
- never run a budget deficit
- always have a surplus in the budget, pay off debt and save for the future
- put strict financial regulation in place that regulates financial products in the same spirit as food products are strictly regulated
- have a central bank whose only concern is fighting inflation, and never to help only the financial markets
- put in place a pay-as-you-go system for all spending bills
Basically, this insures the economic stability of a country. Whatever is left over in the governments budget, is up to the voters to decide what to do with. If the voters want to spend it on healthcare, then they can, if they want to spend it on machine guns and aircraft carriers, then they can.
There is a great economic shift coming to America. Previously, instant gratification has been the name of the game for people as well as government - we could afford anything at any time. That will no longer be the case because of the imminent economic depression. The government has to shift from acting like a gambler in Las Vegas, to acting like a frugal old grandmother.
Grandma for president!
Posted by Jacob at 12:02 PM