Massachusetts Daily Collegian

A free and responsible press serving the UMass community since 1890

A free and responsible press serving the UMass community since 1890

Massachusetts Daily Collegian

A free and responsible press serving the UMass community since 1890

Massachusetts Daily Collegian

The case for real world economics

Last year the University of Massachusetts Republican Club hosted the CEO of Forbes Inc. and the president and editor-in-chief of Forbes magazine, Steve Forbes, who gave a speech on the morality of capitalism as well as its countless benefits on just about every aspect of life.  A week later, I even had the honor of receiving a signed copy of his book.  Not only did this book allow me to objectively view capitalism and presidential actions on the economy throughout the years, but also the ineffectiveness of other economic systems as well.

Flickr/jamesomalley

As an economic conservative, I have many objections to Barack Obama’s policies put in place throughout his first term.  Whether it was the mishandling of the bailout of the banking sector, the unnecessary bailout of the auto industry, the abysmal creation that is Obamacare, or his relentless liberal ideology of throwing money at the economy through the stimulus package, his policies have failed miserably.

Four years into his presidency, our country faces a pivotal turning point that must be dealt with head on.  We have an anemic economic growth rate of 1.3 percent, with one in six Americans in poverty, record-high food stamp usage, 7.8 percent unemployment, a debt above 16 trillion dollars and a fourth straight year of reduction in median household income; a key indicator of the health of a national economy.

Politicians from both sides of the aisle recognize that the economy is in terrible shape.  During his 2008 campaign, Obama promised that he could fix the economy, the public just need to be patient. Critics of Obama predicted that the recession would only deepen with the implementation of his economic policies.

The answer to successful economic policies is the need to stay consistent no matter how deep a recession we are in or which political party enacts them.  As we have witnessed throughout our history, the economy is cyclical. Historically, during a downturn, Democrats tend to want to constantly “do something” about it, instead Steve Forbes says “real world economists” know better.

In a 2004 study, two researchers at the University of California Los Angeles found that the Great Depression was only worsened by policies of Franklin D. Roosevelt. Obama’s current economic policies have brought similar speculation. Through a historical lens, we can look at the economic policies of President Warren G. Harding in 1921 during a time with 11.7 percent unemployment, even higher than today’s rate.   Despite immense internal and external criticism, Harding did not pass any policies to stimulate the economy, but rather reduced government spending due to decreased tax revenues as a result of a shrunken taxable base.  By 1923, the unemployment rate fell to an incredible 2.4 percent without government intervention.  Once again this occurred in 1980, when Reagan inherited a terrible economy with an unemployment rate of 9.7 percent.  In three years unemployment dropped to 7.2 percent, and for the next 20 years we experienced unprecedented economic growth with low inflation and unemployment.

Many seem to believe that Obama saved the auto industry, but fail to realize that these businesses were forced into government-designed recoveries after being bailed out by the government.  As a result, General Motors was unable to recover as they would have in a free-market society and were forced into rewarding union workers with stock in the companies as well as large ownership by the federal government.  Contract law was rewritten and bondholders were cheated by not being paid first. Today, the new General Motors has at least 20,000 fewer workers with stock from what Forbes called “government-restructured automakers” being sold at $10 less than what the government had invested into the company resulting in major loses for stock holders.  In comparison, Ford Motor Company, which was not bailed out during the recession, now enjoys sales that are “up more than 20 percent … the company was on track to gain market share for the first time in almost twenty years,” according to Forbes’ estimates. The lesson learned is that weathering the realistic brutality of a free-market system is ultimately very beneficial.

There has been much speculation of Romney’s proposed tax plan, which gives tax breaks for citizens of every economic class. Romney’s critics believe that his tax policy will only further the gap between the rich and the poor; that businesses and wealthy citizens keeping more of their own money will only worsen the effects of the recession.  However, this supposition has taught us otherwise.  Because the poor and middle-class barely have enough money to spend on a day-to-day basis and must save whatever extra income they may receive, it is the big business owners, or the wealthy who invest their money in businesses and grow our economy.

Consequently, an across the board tax decrease is essential to grow our economy again, not a tax increase for the wealthy. Across-the-board tax cuts are proven stimulants to the economy.  Tax cuts allow big business owners to keep more of their money, creates more disposable income for the middle-class, and creates more of an incentive for businesses to take risks, like expansion.  Expansion creates more jobs, thus reducing unemployment, and produces more wealth, resulting in more tax revenue for the government to pay off the alarming federal government debt of $16 trillion.

It is the instability of policies implemented by the Obama administration, including failed budget proposals, government-implemented overreach in the private sector, investing in Solyndra, and anti-business regulations, that have stifled our economy for the past four years.  It is obvious that the economy is not doing well, and that Obama wants to change that fact.  What is unclear is if he will learn from his mistakes and what history has taught us to in order to take the steps necessary to create an economy worth investing in once again.

David Kaufman is a Collegian columnist. He can be reached at [email protected]

View Comments (3)
More to Discover

Comments (3)

All Massachusetts Daily Collegian Picks Reader Picks Sort: Newest

Your email address will not be published. Required fields are marked *

  • M

    Mary ChapinOct 11, 2012 at 7:11 pm

    Obama and good economic policy.
    I couldn’t disagree more with the editorial from David Kaufman about “real world” economics.
    Is doing nothing while millions suffer a good idea? Yes, if you are billionaire! They always come out ahead after the economy takes a good drubbing. Are business cycles inevitable like the seasons? Absolutely not! CEO’s find them a convenient way to streamline their businesses by “cutting out the dead wood”. They cause unemployment to soar and wages to fall, so that when the next upturn starts the business managers have a cheaper, more quiescent work force. But history shows business cycles can be smoothed out by good government policy.

    Even the data presented in Kaufman’s piece is misleading: gross domestic product (GDP) dropped more than 10% per year every year that Harding was in office doing nothing. GDP rose 10% per year every year of FDR’s first term. Why? The stock market crashed in 1929, caused by unregulated speculation on Wall Street. This led credit to tighten during an already weak economy. This slowed business investment, causing layoffs and wage reductions. In a weak economy, every layoff causes more layoffs: when people in distress stop spending, the people who were supplying them with goods and services need to cut back. These cutbacks mean less buying power for still more people and so on.

    Once an economy starts spiraling downward there is only one way to bring it back: there must be an increase in aggregate demand. Aggregate demand can be increased by a government that spends more revenue than it brings in. This happened during Reagan’s presidency: The national debt rose from $900 billion to $2.8 trillion during Reagan’s tenure due to a combination of tax cuts and increases in defense spending. This led to a decrease in the unemployment rate. (By the way, Reagan is noteworthy for the record levels of corruption in his administration. It was all about helping out those Forbes money guys!). New Deal spending was not enough to create a significant deficit: some would argue that if they had spent more, the depression could have been shortened. Instead, it was the US entry into WWII that caused the huge deficits that brought the economy back to life.

    The situation now is not so different from the Great Depression. The regulations put in place during the New Deal to separate commercial banking from investment banking, the regulations on leveraging, real estate, etc were pulled out one-by-one until the whole structure collapsed like a house of cards. Add to this the fact that the Bush administration’s invasion of Iraq (on false premises) was never paid for by the Bush administration: instead they pushed through huge tax breaks for the richest Americans and left the full deficit and war for Obama! And the bank bailout was initiated by the Bush administration, led by a Treasury Secretary from Goldman Sachs! Again, the Forbes of the world made out fine. Income inequality in the US is at record levels!

    Now lets look at the situation in 2008. Most middle class wealth is in people’s homes and the housing bubble that grew through most of the GW Bush years crashed, leaving millions with homes worth less than their mortgages. Moreover, real wages for middle and lower class Americans have dropped steadily since the Reagan years in part due to outsourcing and the decline of unions. So, people had been trying to maintain their standard of living during a period of falling incomes by borrowing from their home equity, and by working more hours. But, with the loss in home values these folks have hit the wall: they can no longer maintain their old standard of living and hence consumer spending has plummeted. The experience of seventy years of economic policy tells us that the downward spiral caused by this drop in consumer spending must be stopped. BUT the Republicans have not allowed that to happen. States all across the country have made the situation worse by laying off teachers, police, firefighters, postponed construction projects, etc.

    Obama’s stimulus package was exactly the right thing to do at the right time. While many, including Princeton economist Paul Krugman, said the stimulus was too small, it clearly did start turning things around. (nothing is instantaneous) Moreover, the stimulus was not government spending on more war or welfare for the rich (although that is happening). The money was well spent on infrastructure to create the green economy of the future. An excellent book that documents this point is The New New Deal: The Hidden Story of Change in the Obama Era, by Michael Grunwald.

    I haven’t agreed with all of Obama’s economic policies. I thought that extending the Bush tax cuts for the wealthiest, who have made out like bandits in all of this (or maybe they are bandits) was a mistake, and I would have liked to see more done to stop foreclosures where the lack of paperwork was clear evidence of fraud, and I wonder if more could have been done to get Freddie and Fannie to back off of the extreme down payment requirements instituted after the housing bubble burst (like locking the stable door after the horses have fled) to allow the housing market to recover. But overall, his economic policies have been pretty good considering the congressional Republicans insistence on blocking every proposal they can using any means they can.

    As for Obama’s health care reform package, if you are a billionaire like Forbes why would you care if millions are without health care? Republicans stopped the government option from being included in the bill, which would have made is much stronger (why are they afraid to give government a chance to compete with the private sector? Is it because the healthcare provided by the government through the Veterans Administration is both cheaper and better quality than any private health plan?) The current views of the Republican party on health care are so extreme that they are anti birth control for poor women. Studies show that 99% of women of child bearing age use birth control. I think that every woman who supports the Republican party in its current incarnation is a hypocrite.

    Reply
  • H

    HarryOct 10, 2012 at 8:25 pm

    It appears to me that the article is just defining failed existing policies and trying to outline what OUR history has proven to be successful. By continuing down the path we are on we are obviously in for a much worse ride than our European counterparts in the near and long term.

    Reply
  • B

    Brian D.Oct 10, 2012 at 7:34 am

    So you say that the government should cut spending, cut taxes, and refrain from trying to stimulate the economy during a recession? Well, that’s called austerity and it’s EXACTLY what Europe is doing right now. Go ask them how that’s working out for them.

    (hint: unlike the US, which has a weak recovery, they got a second recession)

    Reply