Rainy Day Reading
December 12, 2008
Nobel laureate Joseph E. Stiglitz charts milestones on the road to our imminent ruin. There’s plenty of blame to go around, since the philosophy of relying on deregulation and magic marketplace fairies predated the reign of the Boy Emperor. Follow the article and you’ll see that, as Stigilitz sees it, Reagan started the snowball rolling, Clinton pushed it a bit faster, and Dubya allowed it to become an avalanche. Even as the rumbling sound filled the air:
The president and his advisers seemed to believe that tax cuts, especially for upper-income Americans and corporations, were a cure-all for any economic disease—the modern-day equivalent of leeches. The tax cuts played a pivotal role in shaping the background conditions of the current crisis. Because they did very little to stimulate the economy, real stimulation was left to the Fed, which took up the task with unprecedented low-interest rates and liquidity. The war in Iraq made matters worse, because it led to soaring oil prices. With America so dependent on oil imports, we had to spend several hundred billion more to purchase oil—money that otherwise would have been spent on American goods. Normally this would have led to an economic slowdown, as it had in the 1970s. But the Fed met the challenge in the most myopic way imaginable. The flood of liquidity made money readily available in mortgage markets, even to those who would normally not be able to borrow. And, yes, this succeeded in forestalling an economic downturn; America’s household saving rate plummeted to zero. But it should have been clear that we were living on borrowed money and borrowed time.
The cut in the tax rate on capital gains contributed to the crisis in another way. It was a decision that turned on values: those who speculated (read: gambled) and won were taxed more lightly than wage earners who simply worked hard. But more than that, the decision encouraged leveraging, because interest was tax-deductible. If, for instance, you borrowed a million to buy a home or took a $100,000 home-equity loan to buy stock, the interest would be fully deductible every year. Any capital gains you made were taxed lightly — and at some possibly remote day in the future. The Bush administration was providing an open invitation to excessive borrowing and lending — not that American consumers needed any more encouragement.
The late lamented Molly Ivins once observed that this “government bad, deregulation good” mantra only really started to take hold with the dwindling the generations that remembered the Depression. Those were the people who remembered how bad things could get without some kind of government action to save their necks.
I guess George W. Hoover is giving us a chance to re-learn some things that shouldn’t have been forgotten.