By By Tray Smith
When the economy recovers and the government’s ad hoc array of stimulus plans and bailouts fade, the country must again establish a long term economic policy framework. There is great question as to what that framework will look like.
President Obama, for his part, has expressed an intent to replace an era of “borrow and spend” with “save and invest,” has referred to the prosperity enjoyed before the financial crisis as “fleeting,” and declared that we must move away from an economic cycle of “bubble and burst.”
Yet, it is not entirely accurate to describe the prosperity of the last quarter century as “fleeting” or a cycle of “bubble and burst.” Between 1982 and 2007 there were only two recessions, each of which was shallow and short lived. There were three great periods of economic expansion. The information revolution dramatically altered our standard of living and increased productivity through the invention of the internet and other technologies. Before the internet was created, investments in research and development surged. The economy easily overcame September 11th, the fall of communism, and continuous violence in the Middle East.
In contrast, there were five recessions lasting a total of seven years during the four decades between the end of the Great Depression and 1982. Despite this, New Deal politics prevailed throughout that entire period. Eventually, New Deal politics were replaced by Reaganomics, which led to lower taxes and stable money. Now, the president clearly hopes to move us away from that model, and blames such conservative policies for the current recession.
However, the fact that we are experiencing the first major recession since Ronald Reagan’s presidency does not mean that the policies implemented since that presidency caused this recession, nor does it mean that those policies will be irrelevant once economic growth resumes. Indeed, it is possible that the bottom of this recession has already been hit, and when it is all over it is likely that the effects will still not be as severe as that of the recession in the early 1980’s.
Indeed, more than any single government policy; the root cause of this recession can be traced to the unsustainable trading patterns that have emerged over the past decade. As third world countries like China developed, they saved more and more of their money. Developed economies then borrowed and spent that money. In short, we borrowed money from China in order to buy goods from China without any plan for paying China back. (Of course, the trend did not only apply to China, but also other rising economies like Vietnam and South Korea.) This increased borrowing was supported by rising home values and buried underneath a complex web of financial instruments. While regulators could have tamed back some of those exotic banking products, they could have never prevented the underlying trading discrepancies that caused this recession.
Heading forward, then, the president is right that we must replace our culture of borrowing with more saving, and that should be key to the new economy. Developing countries, meanwhile, should replace their cultures of saving with more spending to stimulate demand. The president is incorrect, though, when he asserts that building a more sustainable economy requires repudiating Reaganomics. Keeping the same economic framework Reagan established in tact will catalyze an adjustment in our consumption patterns and enable a new economy to emerge. Establishing long term prosperity again does not mean repudiating free market economics. Rather, the two go hand and hand.
That is the bottom line.
Tray Smith is a former page in the U.S. House of Representatives. He can be reached at tsmith_90@hotmail.com. His column appears weekly.