When Right Went Wrong

By Bob Wood, MMNS

The week’s big news continued the debate raging over how best to fix our country’s dire economic situation. What amazes me most about this altercation is that the political party tied so closely to big business, capitalism and free markets continues to confuse its priorities, thus making the chaos even worse.

By now, it seems that enough blame has been directed at those who did most to derail our economy, including the stock, housing and jobs markets. Our recent leaders in Washington obviously missed frequent signals begging for financial regulation, which could have helped avoid this disaster. That Republicans owned the White House and controlled both houses of Congress in the middle years of this decade, when the makings of today’s crisis were at their peak, doesn’t dissuade party leaders from making disparaging remarks about the new government’s attempts to fix their mess.

Those former leaders had once showered praise upon then Federal Reserve Chairman Alan Greenspan, dubbing him ‘’the Maestro,’’ the ‘’greatest central banker in history,’’ and ‘’a national treasure.’’ Meanwhile, he was cutting interest rates to historic lows (bottoming at 1%) and encouraging home buyers to discover the wonders of financial innovations like adjustable rate mortgages.

Greenspan raised few eyebrows in Congress when he proclaimed that waiting until the asset bubble imploded before rushing to clean it up was better than stifling free markets. To do otherwise, he theorized, would impede growth with regulation and tighter credit. And just how is his plan working?

Of course, Greenspan was only part of the failed thinking that led the U.S. into an economic abyss. He garnered plenty of support for his claims about the benefits of de-regulation, lower taxes for the smallest portion of us, outsourcing good-paying jobs and the idea that a service-oriented economy would be just as robust as one based on manufacturing.

To this day, many continue to seek guidance from the leadership of the University of Chicago’s Economics department, home of the late Milton Friedman. Friedman’s best ideas, you may recall, served but one purpose: how to create an environment where a very small number of people could become fabulously rich. That those ideas had an uncanny way of making a much larger number of people ruinously poor was obviously considered inconsequential.

And our country’s political right wing appears almost oblivious to how a majority of us are victims of the dismal failings of its approach to running our economy during the Bush administration. They continue to call for even more of what has caused our current perilous economic situation!

Right on cue, this faction gets support from economists at the University of Chicago, as voiced in an opinion piece found in the March 20, 2009 Financial Times. The title of the article written by Gary Becker and Kevin Murphy signals their anguish about the Obama team’s changing course: ‘’Do not let the ‘cure’ destroy capitalism.”

But who am I to criticize a Nobel Prize winner like Becker? Yet I can’t resist comparing the strategy proposed in the article with the results we’ve already seen from it.

Becker and Murphy cite the wonderful period of economic growth seen in the U.S. and around the world since 1980, with “world real gross domestic product growth” of 145% until the end of 2007. That works out to 3.4%/year, on average. Yet they fail to note that, in recent years, growth has been stronger in less capitalistic economies like China, Russia, Brazil and India!

They do mention growth in India and China, “after they introduced market-based reforms,” but not how little their economic principles resemble ours from recent years. And what about stronger growth seen in more balanced economic systems in Canada and Northern Europe, whose economies are often derided as “Socialist”?

The authors cite vastly improved global health statistics with higher life expectancies in the U.S., higher than in lower-income countries. Are they implying that, in Socialistic countries, medical advances have been muted or stifled in any way? Of course, we cannot know for sure what would have happened if any of these countries’ economic planning had gone another way. But can we assume that medical advances would not be better elsewhere than in America, which vastly overspends on private sector health care?

They also note that real per capita incomes have risen by almost 40% since 1980. Doesn’t that seem out of synch with reports that American workers’ average earnings, in real terms, haven’t budged in decades? Sure, those at the top have enjoyed much higher incomes, but what of the rest of us? Becker and Murphy fail to mention, as well, the role of the Federal Reserve under Greenspan, his massive money printing and the inflation stoked by it. They don’t explain why is it so hard for a single breadwinner to support his family today when this was the norm in the 1950s and 1960s.

The authors then delve into how new policy changes by the Obama team will ‘’foster unionization and a more centralized setting of wages’’ — and how that will be a bad thing: ‘’The relative freedom of U.S. labor markets in no way contributed to the crisis and would help to keep it short.’’

If pounding wages lower to less than subsistence levels is a good thing, the method doesn’t seem to produce real results. In what must be a case study in irony, a segment on CNBC’s “Market Watch” covered a Met Life survey of middle class Americans. It showed how roughly 28% of the group considers itself just one paycheck away from falling behind on financial obligations. And one half of the group believes they could get by for up to a month without a job before financial hardship takes hold.

Pounding workers’ wages as low as possible surely has not in any way contributed to massive foreclosures, record setting defaults on credit card loans, a huge pull back in consumer spending, or the shuttering of thousands of retail stores around the country, right? Ah, yeah, sure.

The last economic disaster brought about by this brand of unfettered free market capitalism, greed and concentration of wealth among a few at the top of the heap was the Great Depression of the 1930s. Yet the authors cite that event as having ‘’induced a massive worldwide retreat from capitalism, and an embrace of socialism and communism that continued into the 1960’s. That surely led to slower growth in places like Russia, China and India.

Actually, those were great times for America and the thriving middle class that benefited from strong unions and higher wages, with high taxation at the very top of the income scale. Economic growth was strong and steady after WWII, when health care advances remained steady, and higher education became available to more young people. How can these authors make the case that government involvement made it worse for us collectively than in those periods of unfettered free market capitalism that seem to swing us endlessly from boom times to bust?

Hey, wait a minute! Maybe that’s the real reason, after all! Maybe they really don’t care about our collective well being but merely strive to continue Milton Friedman’s life work: making a very small number of us fabulously wealthy and selling that to the rest of us as being in our best interests!

I’m guessing this is the true aim of what they preach, as if, as a nation, we have yet to wake up to how their best ideas have ruined so many of us and the grievous harm they have done to the country as a whole. The past eight years of Republican government and the free market economic policies championed by the Chicago School have nearly bankrupted us, and our potential pales in comparison to results achieved in Socialist Brazil (covered on the same page of the Financial Times one week earlier).

Results should matter. Warning us to wait long enough to see the proof of their ideas isn’t good enough. Their best ideas have failed the vast majority of us, while enriching a very few. The time for those ideas has passed. Trickle down didn’t trickle down, after all. Tax cuts for the richest haven’t produce jobs as promised, and deregulation has put us on the brink of economic disaster. Wouldn’t you think that these two would see our crisis, admit that its roots centered on the basic beliefs they champion, and do us all a favor:

Sit down, shut up and mercifully allow us the time to fix what you’ve broken!

Have a great week.
Bob

Bob Wood ChFC, CLU Yusuf Kadiwala. Registered Investment Advisors, KMA, Inc., invest@muslimobserver.com.