THE ONLY WAY TO REALLY FIX THE ECONOMY

FEBRUARY 20, 2009

The economy is on everyone’s mind, and now that President Barak Obama is beginning to implement his economic stimulus package, everyone is waiting anxiously to see whether or not it will work. How our economy’s collapse could have been allowed to happen, and more importantly, how it can be rescued now, remains a daily topic of debate.  The search for an understanding of how to keep such a collapse from ever happening again will continue for many years to come. Historians will be writing about it 100 years from now.

If I am not mistaken, most economists would agree that opinions on these matters can be lumped into two main schools of thought -- the same schools that shaped the same debate during the Great Depression.

I will try to summarize each of these schools and point out what I see as a fatal flaw in each. I will then point to what I am convinced is the real root of the problem. Next week, I’ll share what I think must be done if we really want to fix the economy.

School 1 is classic, laissez faire (“non-interference”) capitalism. A core tenet is that government should adopt a “hands off” stance toward the economy. According to the “father” of modern capitalist theory, Adam Smith, an “invisible hand” will guide the economy, according to its own laws. This school holds that government can’t fix the economy, so it shouldn’t try. It argues that any meddling in the economy by the government will only obstruct the freedom of the markets, which is a necessary condition of economic efficiency. (President Hoover followed this doctrine when the Great Depression broke out, but it didn’t make things any better.)

School 2 calls for government intervention.  It is sometimes called the Keynesian school of economics because during the Great Depression, renowned economist John Maynard Keynes was asked what he thought should be done to turn the depressed economy around. He said the government should indeed involve itself. How? One thing he called for was for the government to print money, borrowing it from itself, and put it into circulation to stimulate economic activity. His opponents argued, “No, wait! In the long run, economic problems will correct themselves.” Keynes famous reply was, “In the long run, we’ll all be dead.” Keynes was calling for an immediate response to the dire needs of the destitute masses.

President Roosevelt implemented Keynes’ advice, and yes, it did work to stimulate a lot of economic activity, notably the  government paid for public works projects that put hundreds of thousands of the unemployed back to work.

The Keynesian economic doctrine is very much at the heart of recent “bail out” initiatives by the government, and very much at the heart of what President Obama’s economic stimulus package is about.

If Keynesian-type economic initiatives are the answer, why are some opposing it? Because of its negative effects down the road. If the government borrows from itself by printing more money to stimulate the economy, it must all be repaid in the future.

The government can’t create more wealth; only more money, and the more dollars it prints, the less each dollar is worth. This, we know, is called inflation. Opponents of today’s bailouts and economic stimulus proposals can show that the Great Depression got worse after the government put the country into deeper debt by borrowing money from itself. Other historical factors contributed to strengthen the economy and bring the country out of the depression. 
Over-borrowing is what got us into today’s crisis, say opponents of this stimulus plan, and borrowing more money now to fix the problem really only makes it worse, by plunging us into even deeper debt, while postponing the day of reckoning a little longer. Our nation is broke, they say, and a deep recession now is not the problem, but the necessary, though painful, cure.

Supporters of governmental initiatives, on the other hand, remind opponents that it was not government meddling in economic affairs that caused today’s problems, but a lack of it. It was following “non-interference” doctrine that allowed unregulated practices by irresponsible financial institutions – mostly in the form of very bad loans – to run wild.

Both sides have valid points, but what’s missing from the debate?

Let’s backtrack the problem. Why did so many people bury themselves in debt? In too many cases, it was because they were being paid depressed wages by employers who were guided by an all consuming thirst for profits. The first domino to fall in the cascade of events was the sub-prime mortgage default crisis. Many home buyers had been led to believe they could “flip” their purchases, that is, sell them later for a higher price, thus turning a profit for themselves. Lenders tricked borrowers into impossible financing terms for the purpose of maximizing their own profits. The pied piper who led everyone up the precipice of risk, then over the edge, was the profit motive – the desire not just for a fair profit, but for the largest one that could possibly be leveraged!

As the money changers marched up the precipice of ever higher risks in search of ever higher profits, they simultaneously slid ever farther down the slippery moral slope. The light of conscience dimmed. Prudence and justice slipped from view. Greed had caused blindness. The economic laws of capitalism were never broken, but the moral law was. The choice had been made to serve mammon, not God or neighbor. The true cause of the economic collapse was a collapse of moral sanity.

Next week I will propose what I think is the only real fix for the economy.

+Bishop Raymundo J. Peña

last updated 11-Jan-2010 8:22 sitemap