Posts Tagged 'Economy'

The Global Recession: the Age of Big Government

Jeremy Martin


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Courtesy of bulletin.aarp.org

The global economic slowdown has compelled policy-makers to arrive at a series of controversial decisions, an important one being the embrace of “Big Government” policies. Stuck in the worst financial quagmire since the Great Depression, countries around the world are now using this approach to stop the bleeding. Washington adopted Treasury Secretary Henry Paulson’s bailout plan, initially set at $700 billion but recently raised to $1 trillion. The European Commission followed suit in Brussels with an injection of $2.3 trillion into various sectors across the Euro zone, and China plans to spend $586 billion by 2010 in order to stimulate its own limping economy. Such actions have been taken by other developed and emerging economies alike, further proving that the worldwide recession is here to stay.

Never before have we seen the Big Government phenomenon at work on such an unprecedented scale. By making Big Government strategies the bedrock of their country’s political platform, policy-makers endanger the likelihood of finding a real, inward-oriented panacea for the problems faced by their constituents.  Policy-makers dedicated to massaging tense markets through interventionist mechanisms, particularly in the U.S., have neglected investment in human capital and infrastructure—two necessary components for expanding business operations and opening up opportunities for hiring workers.

As a result of globalization, the economic slump that originated in the U.S. has bloomed into an ominous phenomenon referred to as “systemic risk,” where idiosyncratic shocks like the credit crunch threaten the stability of the entire global financial system. In the past months, big investment banks, insurance companies, and mortgage finance businesses have either collapsed (like Lehman Brothers) or merged (like Merrill Lynch and Bank of America). Consequently, the federal government has handpicked those companies that are worth saving, or, perhaps more accurately, are capable of being saved. Other regions like the EU are now scurrying to boost market liquidity by guaranteeing loans, bank co-insurance, and increased minimum protection for deposits of up to €100,000.

Unfortunately, our country, America, has tallied the most impressive (or in other words, unimpressive) list of all. The Troubled Asset Relief Program will dish out $1 trillion for Wall Street banks and troubled mortgaged-backed securities. Furthermore, the federal government wishes to rescue the Auto Industry with $30 billion for companies like Ford, Chrysler, and General Motors. It has bought up mortgage linchpins Fannie Mae and Freddie Mac for $200 billion, and increased its bailout for insurance giant A.I.G. from $85 billion to $150 billion. Within this maelstrom one incontrovertible fact remains clear: U.S. politicians have grown increasingly committed to Big Government in resuscitating the domestic economy and hitting the brakes on systemic risk.

This is not to say that our government should sit with its hands tied. Clearly our nation and others need help in some form or another. U.S. unemployment has reached the highest rate in 14 years, hovering around 6.5% and likely to surpass 8% by 2009. The U.S. stock market is 35% below its peak last fall and with foreclosures and tightening credit, any economic analyst would agree that the future continues to appear less bright.

It is therefore no surprise that some Americans in peril have ardently defended the government’s fiscal, monetary, and structural policies. In the minds of federal constituents, government spending should be used as a last resort, and if used correctly, can do some real good. This is only partly true. Americans and their democratically-elected politicians have consistently avoided a libertarian vision of life. FDR’s New Deal and LBJ’s “Great Society” definitely had their merits.

Yet the U.S. also has a history of bad government spending and inefficacy. Programs like Medicare (which is cash-flow negative) and Social Security (which will be within the next decade) are far from effective. Not to mention recent $100 billion federal executive departments such as Homeland Security and Veterans Affairs, which speak to the Bush Administration’s outright rejection of limited government.

And so, with a new administration on the way, we can see two roads diverging in a very troubling wood: one which points out how the conservative ideology—the belief that greed is always good—has provoked the crisis. The other perspective echoes what FDR spoke of in his second inaugural address: that “we have always known that heedless self-interest was bad morals; we know now that it is bad economics.”

Whatever the case may be, we will surely witness some bulked-up version of Big Sam — higher taxes, more regulation and increased spending — after inauguration day. Obama’s proposed plans are estimated to require a 39.6% personal income tax, a 52.2% combined income and payroll tax, a 28% capital-gains tax, a 39.6% dividends tax, and a 55% estate tax, all of which are much higher than what taxpayers have doled out in the past. According to the Wall Street Journal, Obama’s economic strategy amounts to $800 billion in spending on various plans such as green energy, establishing an infrastructure investment bank, expanding health insurance, regulating drug company and energy firm profits, and creating a mortgage-interest tax credit.

The upper class alone surely cannot and, most likely, will not pay for Obama’s plans. Instead, the middle class will probably end up assuming the “beast of burden” position, paying the costs of the policies that are purportedly intended to help them. According to his own web site, “Senator Obama is the only candidate with a plan to provide broad-based tax relief to the middle class, offering a credit of $1,000 per family or $500 per individual every year, and eliminating income taxes entirely for seniors making less than $50,000.”

Obama’s platform is both laudable and worrisome at the same time.  He appears to overlook the vital role of capital formation in creating businesses and jobs. Drastic redistribution of income and wealth spells disaster for entrepreneurs, small family-owned businesses, and investors alike. With the current bailout plans tacked on top of Obama’s economic remodeling, there is no question the U.S. debt will balloon.

We need to push Big Government to step in for other, arguably more pressing long-term issues such as more sound sustainable development, which Obama supports in principle, in a way that can provide jobs and produce consumer-friendly technology for industries like agriculture and construction. Do not ban NAFTA or raise barriers to free trade. Obama and his administration must resist gimmicks like the Gas Tax holiday and petty tax benefits to the middle class. Avoid empty promises and do something that can actually get done.

I applaud Obama for some of his principles but I think he should alter how he plans to execute his proposals. Let’s go for a ‘new’ New Deal, and, as recent Nobel Prize winner in economics, Paul Krugman, says, emphasize the provision of “aid to beleaguered state and local governments, so that they can sustain essential public services, [which] is important for those who depend on those services; it’s also a way to avoid job losses and limit the depth of the economy’s slump.”

If Big Government is going to raise taxes, fine. Our country must face the music. But why not do it for something worthy like making higher education less costly and cutting military expenditures for the two ongoing wars in Iraq and Afghanistan? As Rep. Rahm Emanuel (Obama’s future Chief of Staff) put it, “I don’t think we need Big Government, but Big Solutions.” Big or small Government, the U.S. is in pretty deep with $44 trillion in unfunded entitlement obligations and $9 trillion stacked up in national debt. In light of globalization, we must first look inward by investing in human capital, sustainable development initiatives, and efficient infrastructure for actual change. For once, we need to let the world be and focus our attention on rebuilding our own country.

This will be more possible with Democrats dominating the Senate and the House of Representatives. But I don’t expect Obama and the Democrats to have all the answers. We’re walking through cash quicksand and we need to find prudent ways to get out. Looking ahead for long-term solutions, not short-term fixes, is the key. In this globalized world, you can run, but you cannot hide from volatility. In the meantime, let’s keep our fingers crossed.

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