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Here we are, two years into an economic meltdown, and we’re getting two messages from the practitioners of the dismal science. We’re either on the mend or we’re going deeper in the hole. Give me a coin and I’ll toss it and if it’s tails I’m right - if it’s heads I’m still right.
The best way to judge the wisdom of whatever an economist predicts is to look back at their collective record. How many of them predicted the financial meltdown and the bursting of the housing bubble? How many of them predicted that the official unemployment rate would top 10% and how many of them saw the rapid decline in the value of the dollar?
A frustrated Harry Truman once screamed at his economic advisers “give me a one-handed economist! All my economists say - on the one hand and on the other.”
The problem with economic theory is that it looks backwards. In developing his economic theories - Adam Smith was looking at a landscape where France and England were trying to compete with one another to dominate the potato market and the Brits had a competitive disadvantage in producing French lace. As for Karl Marx, he was dealing with an environment where hordes of landless peasants were streaming into cities in search for jobs as industrial laborers and Keynes reacted to the catastrophic drop in consumer demand by advocating government deficit spending.
We’re dealing with a different economic beast here. We live in a world that’s larger than France and England, we’re de-industrializing and government deficit spending over the last thirty years has added 11 trillion dollars to the national debt. It was barely a trillion when Reagan took office.
The worst thing we can do is to try to pump up demand - especially consumer demand. The stimulus package which targeted consumers might give the economy a temporary respite. But the fact is we don’t just live in a consumer driven society - we’ve created an economy where over-consumption is a real threat to the economic health of the nation.
What’s wrong with this picture? Well, for one, the government’s concern about the deflation in housing prices is misplaced. The very definition of a housing bubble is that homes were overpriced. If we let them come down, the sensible people who refused to buy during the bubble will have access to affordable housing. In addition, younger people looking to buy for the first time will be able to do it without stretching themselves to the brink just to get in a starter home.
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