The left has been proclaiming that the era of Reaganomics is over. The proposed bail-out of Wall Street will user in a new era of expanded government and re-regulation. While that may be true, there are several lessons from the Reagan era that should not be forgotten - or in the case of Senator Obama, should be learned for the first time.
1. We cannot tax our way into prosperity.
This is a big one but easily forgotten. The government does a poor job of creating prosperity. Taxes take money that could be invested or spent and redirects it elsewhere. Bill Clinton likes to talk about the economy during his presidency but it was built on and continued Reaganomics (except for the gasoline tax that he enacted early in his presidency). Obama has talked about raising the corporate tax rate, either directly or by eliminating "loopholes". This will reduce the amount of money that corporations can invest and make it more desirable for them to move overseas.
1a. We cannot regulate our way into prosperity.
Some regulations are needed. Even staunch Libertarians admit that the marketplace needs laws and regulations to keep things honest. Once those basic standards are met, regulations can quickly become a problem. One factor in the current credit crisis was regulations designed to increase minority home ownership. Banks were told to start lending to people who previously had been denied mortgages. There was a good reason for denying these loans. This is where a lot of the defaults are coming from - people who previously did not qualify for loans.
1b. We cannot redistribute our way to prosperity.
Tax cuts stimulate the economy. Tax increases create drag. If you raise taxes on one group and cut them for others the best you can hope for is equilibrium.
2. Bubbles happen.
Bubbles happen fairly often. Some are fairly small and self-contained like the Beanie Baby craze in the late 1990s or POGs prior to that. Others are large and affect the entire economy when they burst. The dot-com bubble of the late 1990s and the Japanese real estate bubble in the late 1980s are examples.
The problem with bubbles is that you can never have enough regulations to stop them. They are a product of the free market and they never happen the same way twice. There is also a phase when the participants believe that growth will continue in a straight line forever. During the 1990s, Bill Clinton spent a lot of time bragging about the Internet and the New Economy. People claimed that it would be recession-proof and continue to grow past all previous limits. The Japanese insisted the same thing about their economy in the late 1980s. There was a major craze in the US for emulating the Japanese way of doing business. as it turned out, Japanese business growth was tied directly to real estate prices in Japan. Companies that were losing money reported paper profits because the land that their offices sat on appreciated. At one point a single block in the Tokyo business district was reputed to worth more than all of California.
A second problem with bubbles is that no one wants to end them. It usually becomes obvious to outside observers that the bubble cannot last but by that point, breaking the bubble will cause pain. No one wants to be the one to do that. There were several warnings over the last few years that Fannie Mae and Freddie Mac were buying too many questionable loans but stopping this practice would make home ownership more difficult so nothing was done.
Housing values present a difficult problem. On one hand, they are too high which creates an entry barrier for the same low-income people that were supposed to be helped. On the other hand, lowering the value of housing back to reasonable levels will hurt everyone who bought during the bubble. Probably housing values will essentially freeze for several years until the actual value catches up with the inflated value.
3. Government interference in the marketplace often turns out badly.
Fannie Mae and Freddie Mac are terrible examples of the free market. They are public/private entities. They have access to below-market interest rates but private ownership. It has always been assumed that they are too bid to fail and that the government will bail them out if they get into serious trouble. That encourages risky behavior. The government is involved in every level of the current crisis. For example, Real estate prices started to climb when the Fed reduced interest rates to historic lows in order to stimulate the economy after the dot-com crash.
Senator Obama's solution to every problem is more government involvement. In the last century we have had two periods when we expanded the size and scope of government - the 1930s and the 1960. Both were followed by long-term economic hardship. The problems of the 1960s didn't end until the 1980s and the start of Reagonomics. A return to the economic principles of the 1960s and 1970s almost guarentees a return of stagflation and the other economic ills of that period.
Class dismissed.
Hedge funds are not as tightly controlled by the government and are not having the current problems.
1. We cannot tax our way into prosperity.
This is a big one but easily forgotten. The government does a poor job of creating prosperity. Taxes take money that could be invested or spent and redirects it elsewhere. Bill Clinton likes to talk about the economy during his presidency but it was built on and continued Reaganomics (except for the gasoline tax that he enacted early in his presidency). Obama has talked about raising the corporate tax rate, either directly or by eliminating "loopholes". This will reduce the amount of money that corporations can invest and make it more desirable for them to move overseas.
1a. We cannot regulate our way into prosperity.
Some regulations are needed. Even staunch Libertarians admit that the marketplace needs laws and regulations to keep things honest. Once those basic standards are met, regulations can quickly become a problem. One factor in the current credit crisis was regulations designed to increase minority home ownership. Banks were told to start lending to people who previously had been denied mortgages. There was a good reason for denying these loans. This is where a lot of the defaults are coming from - people who previously did not qualify for loans.
1b. We cannot redistribute our way to prosperity.
Tax cuts stimulate the economy. Tax increases create drag. If you raise taxes on one group and cut them for others the best you can hope for is equilibrium.
2. Bubbles happen.
Bubbles happen fairly often. Some are fairly small and self-contained like the Beanie Baby craze in the late 1990s or POGs prior to that. Others are large and affect the entire economy when they burst. The dot-com bubble of the late 1990s and the Japanese real estate bubble in the late 1980s are examples.
The problem with bubbles is that you can never have enough regulations to stop them. They are a product of the free market and they never happen the same way twice. There is also a phase when the participants believe that growth will continue in a straight line forever. During the 1990s, Bill Clinton spent a lot of time bragging about the Internet and the New Economy. People claimed that it would be recession-proof and continue to grow past all previous limits. The Japanese insisted the same thing about their economy in the late 1980s. There was a major craze in the US for emulating the Japanese way of doing business. as it turned out, Japanese business growth was tied directly to real estate prices in Japan. Companies that were losing money reported paper profits because the land that their offices sat on appreciated. At one point a single block in the Tokyo business district was reputed to worth more than all of California.
A second problem with bubbles is that no one wants to end them. It usually becomes obvious to outside observers that the bubble cannot last but by that point, breaking the bubble will cause pain. No one wants to be the one to do that. There were several warnings over the last few years that Fannie Mae and Freddie Mac were buying too many questionable loans but stopping this practice would make home ownership more difficult so nothing was done.
Housing values present a difficult problem. On one hand, they are too high which creates an entry barrier for the same low-income people that were supposed to be helped. On the other hand, lowering the value of housing back to reasonable levels will hurt everyone who bought during the bubble. Probably housing values will essentially freeze for several years until the actual value catches up with the inflated value.
3. Government interference in the marketplace often turns out badly.
Fannie Mae and Freddie Mac are terrible examples of the free market. They are public/private entities. They have access to below-market interest rates but private ownership. It has always been assumed that they are too bid to fail and that the government will bail them out if they get into serious trouble. That encourages risky behavior. The government is involved in every level of the current crisis. For example, Real estate prices started to climb when the Fed reduced interest rates to historic lows in order to stimulate the economy after the dot-com crash.
Senator Obama's solution to every problem is more government involvement. In the last century we have had two periods when we expanded the size and scope of government - the 1930s and the 1960. Both were followed by long-term economic hardship. The problems of the 1960s didn't end until the 1980s and the start of Reagonomics. A return to the economic principles of the 1960s and 1970s almost guarentees a return of stagflation and the other economic ills of that period.
Class dismissed.
Hedge funds are not as tightly controlled by the government and are not having the current problems.
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