Restored trust: the gift that keeps on giving
December 21, 2008
It is the Christmas season and the time to give and to receive. There are several kinds of presents: the ones you enjoyed immediately, like toys. Another is the “gift that keeps on giving”. When I was little, savings bonds were the ones that kept on giving. What a bore. I considered them non-gifts. I didn’t appreciate them until much later in life.
The government and taxpayer bailouts of the Bush administration ($700 billion) and the hints of economic stimulus plans of President Elect Obama, totaling $850 billion over two years, are the most expensive Christmas presents our economy could imagine. Some meet an instant need. Others could be a gift that keeps on giving back to the taxpayers.
There are those who say we should let the free market take care of this economic crisis, thinking it is better to have short term pain, and hoping the economy could recover more quickly than if there was government intervention.
History gives us a reality check: Government hands-off, laissez-faire capitalism failed to stop the crash in the four year period between the 1929 stock market meltdown and the election of Franklin Delano Roosevelt. That the economy would have revived on its own is only a theory treasured by some free market purists. It never happened because resulting economic turmoil created too much pain for voters to ignore.
Reality is that the public does not have the political will to endure extreme economic pain.
In Europe ineffective government reaction to the Depression provided an opportunity for exploitation by demagogues and dictators, such as Hitler and Mussolini. FDR’s New Deal addressed the immediate pain of its citizens with make-work programs and the creation of social safety nets such as Social Security so it prevented the extremist reactions felt in other parts of the world.
A New Deal ditto, however, is not the right direction these days, either. Where Franklin Delano Roosevelt’s New Deal failed was that it underemphasized programs that primed the private sector pump in the long term. It was primarily a short term balm on an open wound of unemployment and poverty.
What we need is a one-two punch: a combination of a jolt to create jobs in the short run while providing the groundwork for a for private sector revival and an eventual payback to our treasury in the form of income from taxes and loan repayments. Bankrupt businesses and unemployed citizens cannot repay debts or pay taxes.
Fortunately, Obama recognizes the value of an economic stimulus program that will do both. He understands the need to put balm on the immediate pain of foreclosures and joblessness as well as creating long term private sector opportunities.
Conversion of the rust belt to green manufacturing or enhancing broadband and our electrical grid will take time to develop and will create a base for new private sector ventures in the future. Federal money for state roads and bridges and school construction will create jobs in the short term.
Obama’s stimulus plan could also make some needed reforms by attaching strings to loans and bailouts. For example, it is an opportunity to change the mindset and modus operandi of Detroit. I agree with William Hamilton’s column (Dec.17) assessment of the cause of the problems. Both the UAW and big auto executives are guilty. There needs to be a total cleaning out of the entire auto-labor relationship to make what is left of the Big 3 competitive. Both have to get more than haircuts: They need buzz cuts down to the scalp.
Whether reform is accomplished by mandated government oversight or bankruptcy is an open question, though many experts believe bankruptcy may deliver a fatal blow instead of reformation. That may be a lump of coal in our stockings that we could not tolerate. It is not in our national interest if the U.S. auto industry locks its plant gates and walks away. The industry is too important to our national defense.
Unemployment would soar to double digits because of the ripple effect throughout the economy. In the next call to arms, I am not anxious to have Humvees by Honda or Tanks by Toyota.
President Bush on Friday recognized both of these issues in providing a three month bridge loan with heavy duty strings attached, including an option for government takeover if GM and Chrysler fail to come up with a viable plan by then. It will be up to the new Congress and the Obama administration to hammer out the longer term solution before next March.
Obama has an opportunity to undertake needed reforms in the financial sector, as well. The failure of the TARP bailout to attack the mortgage problem is very troublesome. Twenty percent of all mortgages in the United States are either in arrears or are in foreclosure. The well documented abuses in our financial institutions and the failure of regulators to catch scams, such as Madoff’s alleged $50 billion ripoff, are appalling. New regulations and revitalized regulators would go a long way to making our capitalistic, market economy work better and restore the trust of investors. That indeed would be a gift that would keep on giving.
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