Troubling Conclusions

Tom Watt

The conclusion of last week’s “Being Right” column, “The Incentive of Fear,” came to a troubling conclusion:

“When the Republicans used ‘scare tactics,’ at least their intentions were honorable; Al Qaeda was and is a legitimate threat to our safety. The Democrats are now trying to use scare tactics to terrify the American consumer. Americans do not need politicians to stand up and tell us the economy is a disaster. This is a consumer-driven economic downturn. If Americans are terrified that the economy is going to go down the tubes, they aren’t going to spend any money. The last thing we need is for Americans to be afraid to spend money. Then we really will have an economic slowdown and a financial crisis.”

First of all, the statement, “This is a consumer-driven economic downturn” is a gigantic misstatement, as it fails to hit upon the underlying problems of the financial crisis. We are on the brink of a recession directly caused by the subprime mortgage crisis. Essentially people who would normally not have qualified for a loan received loans with which they bought properties that they could not afford, banking on the hope that the housing market would continue its upward trend.

In the beginning of 2007, however, house prices began to fall, and as a result, we began to see skyrocketing foreclosure rates resulting from individuals who had essentially gambled on the housing market. These foreclosures had resounding implications across the financial sector. Foreclosures caused banks to lose money on loans and investment firms to lose massive sums on risky real estate investments, ultimately resulting in the failure of investment firms.

Alan Greenspan, the Republican ex-Fed Chairman, called the current situation a “once-in-a-century type of financial crisis,” effectively ramming home the point that this is not just an “economic slowdown.” As such, the implications drawn from the conclusion are misleading at best. The author writes, “The last thing we need is for Americans to be afraid to spend money.” While certainly a reduction in expenditure will drive down the economy, this is not relevant to the current discussion. We are in the situation that we are in today because people spent money that they didn’t have and because investment firms in turn invested money in risky accounts that then defaulted, not because people have not been consuming enough.

The author went on to say that “John McCain’s tax plan is right; it subscribes to a Reagan-esque idea of trickle down economics.” Trickle down economics, in the form of tax cuts for the super wealthy is simply not effective. President Bush admitted this, as did Congress as a whole, when the 2008 stimulus package was put into place. Called a “booster” for the economy, “The package will pay $600 to most individual taxpayers and $1,200 to married taxpayers filing joint returns, so long as they are below income caps of $75,000 for individuals and $150,000 for couples (CNN).” This is testament to the fact that when the economy is in danger of recession, we give money to those at the bottom of the economic pyramid (because the economy is built from the ground up, not money trickling down from the purchases of the super wealthy). On the other hand when we give out tax breaks to those making over $250,000 a year, let’s call it what it is…handouts.

Lastly, I would like to comment on the author’s point that “Bigger government is never the answer.” While the comment fails to account for the problem of market failures such as public goods, negative externalities and the “tragedy of the commons” that can, in many situations, only effectively be dealt with by a government-like agency, it also serves to highlight the problem in the analysis. One of the primary reasons that we are in the situation that we are in is because of the lack of regulation in the financial markets, and thus, this entire situation is, at its core, a referendum on the Republican ideology of government non-interventionism.