What’s the Deal With Private Sector Economic Solutions?

Hello all! and welcome to another stirring edition of “What’s the Deal?”  The blog normally used for terrible jokes/puns, but this week we’re switching it up.

So far, I haven’t used this Blog to set up a bully pulpit and spout a stream of opinions; my main objective has been to present the historical aspects of current events to promote greater understanding.  The unveiling of Republican 2012 Pres. Candidate Mitt Romney’s jobs plan for the U.S. however, has me really confused/upset and ready to rant.

Hoping the centennial anniversary of Bull Moose breaks up the 2012 Republican Race

At first, I was glad that someone in the Republican field had actually produced a plan for economic recovery instead of shouting and blocking legislation, the first such actual work done by the Republicans since Paul Ryan’s “Road to Prosperity” plan.  Then, I made the mistake of actually reading the content of the plan, or the lack there of.

Romney’s plan is the typical embodiment of fiscal conservatism and proposes to cut government spending, reduce taxes dramatically for everyone, with an emphasis on cutting corporate and business taxes.  The idea there being to stimulate small businesses and corporations into hiring more people because there is more money to spend on growing the company.  The Romney plan fits well with the conservative base/Tea Party movement he is trying to reach and appeal to by putting the private sector and small businesses in the “drivers seat” of the economy.

This plan sounds good for individuals/businesses at first, but makes no sense when looking at the recent history of the U.S. economy.  Looking at Republican ideas and proposals right now is mind-boggling considering what just went throughthree years ago and the specific cause.

After 12 months, $150/month, with mandatory pop-up ads

In 2007/08, the credit and housing industries burst their bubbles because many people who bought houses or borrowed on credit couldn’t actually make their payments.  In other words, creditors were lending to people who did not have the capacity to borrow.  Normally, banks and credit institutions will not lend to such consumers, but agencies were emboldened by record profit surges in the housing and credit markets, and went ahead anyways and did this.  To bypass regulation on lending practices, banks hid payments that consumers needed to make with cheap initial contracts that made the deal seem affordable to the average consumer, when really, unaffordable fees and payments were hidden behind the initial deal.

"What about the rest of the contract?" "Oh, that's just the fine print, like the side effects of prescription drugs."

So, credit agencies were making initial record profits, but that would be defaulted on later, and the effect snowballed, as a credit driven consumer economy caught up with the rest of the country.  A couple of main causes for the 2008 Recession (that we’re still mired in):

  1. A Drive For Profit by private industry, Irregardless of the Consequences
  2. Weak or Ineffective Regulation of Credit Industries
  3. False Consumer Confidence

So, if the cause of the recession itself was the result of the recklessness of private industry, it makes you stop and think: Wait, why do politicians want to put more power of the economy into private hands?

It makes you shake your head even more when financial institutions like AIG and Goldman Sachs give their executives bonuses, after they were bailed out by the U.S. Government.  More of our institutions into the hands of profit seeking, risky, individuals?  These are the people we are depending on to grow our economy, educate our children, and support the needy?  If we take education and social services out of the public sphere, how are we going to grow and support ourselves?  In private hands, there is no profit in these services, except for the very rich (private schools), so why would the private sector work to build these services?

Let’s hop in our time machine back to the impetus of the current Republican economic plan, supply-side economics, or more famously, Reaganomics, for the economic plan put in place during the Reagan administration, The Economic Recovery Tax Act of 1981 .  Espousing smaller government and lower taxes, the idea is to give businesses and individuals more money to spend instead of taxes so that companies will hire more people and grow the overall economy, because businesses have more freedom to grow.  Also included in the plan (mirrored in Romney’s plan) was the “tax bracketing plan” so that richer people don’t pay more in taxes than others.

This was a recipe for a small sector of the population to gain immensely, and reach the overall U.S. economy to record levels.  Record profits were made by large corporations and individuals, but the gap between rich and poor widened tremendously, and the poverty rate climbed as cuts were made to Government programs to help the needy.

Did Reaganomics actually work?  It is absolutely true that the overall GDP of the U.S. grew tremendously and that the stock market reached record levels frequently (until the economic crash of 1987).  But what did this atmosphere of limited government regulation in business and reduced government spending really create?  Unfortunately, it created a mindset of profit over people with the “Capitalism heroes” Jack Welch and Donald Trump and a culture of risky business.  It also created a huge gap in between those who already had power/money, and those who did not stand to improve from trickle down policies.

Grabbing profits by the horns (another bull reference?)

So less taxes helped wealthy individuals (because they have the most to gain), and we saw corporations not seeking to add jobs here in the U.S., but overseas, where wages/prices were cheaper.  The easing of regulations on the Savings and Loans Banks during the Reagan years led to risky loans and high interest rates to borrowers, and when borrowers couldn’t pay back their loans, the government (who insured accounts in Savings) had to bail out the S & L.  (Sound familiar?)

So we’ve seen what happens when more of the economy is put into private hands: record profits for some at the expense of increased poverty, less services for the poor, and a weakened infrastructure with little job creation.  So Romney’s plan (and the Republican doctrine) is really a repeat of this.  THIS IS NOT WHAT WE NEED RIGHT NOW

WE NEED:

  1. Continued Regulation of Credit Agencies
  2. Government to continue to provide services to get people through this recession.
  3. A Realization that Americans need to live within their means

I don’t have an answer for the jobs question, but I am positive that Supply – Side economics will not be the answer in reducing 9.8% unemployment, and will only to continue to widen the gap between rich and poor.  Why the obsession with putting the hands of our services and economy into the hands of private industry?  An industry with a proven record of selfishness and risk taking behavior that does not give a shit about the consequences (except for profits).

I’m all for balancing the budget (a buzz phrase if there ever was one), something that Reagan never did.  Balancing the budget though, should be done by keeping entitlements and social service programs in place, and reducing spending on an out of control Intelligence budget.

Well, sorry for the rant folks.  I normally try to remain politically neutral, but Romney’s plan just had me all hot and bothered (and I didn’t even mention his plan to place sanctions on China!)  So, I’ll try and keep calm for next week’s blog and retain focus on historical perspective, but in the meantime, have a great week.

Onward and Upward!

Your Faithful Historian,

Eric G. Prileson

Sources:

http://www.roadmap.republicans.budget.house.gov/Plan/

http://www.nytimes.com/2011/09/07/us/politics/07romney.html?_r=3Al

Almanac of American History, edited by Schlesinger Jr.

US History, James Ciment.

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About eprileson

I am a historian and writer who wants to bring to light current events through a historical perspective. It is difficult to understand today's current events without having a grasp of what has occurred before. This is a running thread to help keep people informed about the present and remind everyone to not forget their past. Enjoy and please comment!
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2 Responses to What’s the Deal With Private Sector Economic Solutions?

  1. Mephisto says:

    Great piece.

    You should follow asset management co-founder/investor Jeremy Grantham. He gives a no-nonsense business-insider look at the reality of what’s going on. Also he does a ton of research and compiles data to include in his articles.

    “Predictably, the developed world ages, the percentage increase in new workers declines, pensions and health benefits bloom, and balanced budgets clearly become mathematically impossible without either substantial reneging on commitments or tax increases or both. Any other pretense is beyond wishful thinking or weak math skills. It is either childish or gross and cynical politics: that is to say, even worse politics than usual.” – Jeremy Grantham

    “Today the artificial sugar-coating of increasing debt has been removed and we must live with the reality that an average hour’s work has not received a material increase for 40 years (see Exhibit 3). Without increased debt and without gains in hourly wages, how can there be sustained broad gains in consumption?” – Jeremy Grantham

    “I came to realize that the unpalatable (to me) option of some debt forgiveness on mortgages looks increasingly to be necessary as well as the tax changes I discuss here.” – Jeremy Grantham

    http://www.gmo.com/websitecontent/JGLetter_Pt2_DangerChildrenatPlay_2Q11.pdf

  2. Mephisto says:

    “So, if the cause of the recession itself was the result of the recklessness of private industry, it makes you stop and think: Wait, why do politicians want to put more power of the economy into private hands?”

    That’s the million-dollar question that I’ve been asking myself this whole time. It’s clear the Tea-Party is seriously, fatally misguided.

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