How to Fix the American Economy

While I was typing up my research paper on the economic crisis of 2008, I realized just how bad things are. During the process, I also thought of a few interesting propositions, some of which are more useful than others.

Introduction/Guide to Reading My List of Proposals:
This is my devised list of Economic proposals. I have received inspiration for my proposals from various sources, but unless otherwise noted, each of my ideas is completely original. I have also focused more on the expression of my ideas rather than rhetorical utilization of my language. As a result, my work may have a few grammatical errors and may sound overtly colloquial at times. I apologize.

I would also recommend that  my piece be printed out and read due to its text heavy nature.  It can be copied and pasted onto Microsoft Word and printed from there. I tend to find it much less taxing to read a paper article than an online article.

Also, since I realize my work is quite long, I would like to note which proposals I deem most essential. My most critical proposal is the one titled Welfare. Read it before reading either of the others. Also close in importance and originality are the proposals titled The Employment Bureau, and A Nuanced Solution to Outsourcing.

These three are by far the most original and the most integral to my overlying plan. However, I would love for anyone to read my piece in its entirety and would greatly appreciate some feedback as well.

-Good Luck, Yousuf Hafuda

Cut military spending: Since the United States already has a military force powerful enough to destroy the World a few times over, there is no need for expansion. Much of the money spent on Military expenditures could be utilized elsewhere, and cutting it could help curtail the widening deficits.

Furthermore, Military cuts do not hinder the economy like other cuts, because they are not tied to the well-being of the average American. Sure some people are employed by Northrop or Lockheed Martin, but a downsizing of both our costs and a complete pullout from the Middle East could help the underlying economy and the overall health of the United States.

If a military is designed to parry attacks, then our military has done its job. Once the Military is used to infringe on the rights of other people then there is a problem.

The United States no longer faces a potent threat in the same way it did in the 60's with the USSR. Thus, a downsizing by the World leader would induce other countries to follow suit and create a domino effect that makes the world a whole lot safer. Sure, a world without Military is unlikely and imprudent, but a world with excessive military powers is the worst of them all.

Ban Securitization: It must be made clear that the reason why bankers behaved irrationally leading up to 2008 is because of flawed incentives. People respond to incentives, and the crux of the financial crisis lies in the lack of proper incentives. The traditional method of banking used to be as follows:  Banks give out loans. They are attached to these loans and eventually receive (or do not receive) payment for the loans. Thus, banks loaned money to candidates they thought would eventually pay them back.

However, what was once a functioning system was unscrupulously replaced in the 1980s.and more prominently in the 90s. Instead of being attached to their loans, banks were free to sell their loans as investments.

The aim of this new approach was to spread risk so that an honest bank would not be hindered by extraneous circumstances. However, what began to happen was the natural tendency of banks to sell faulty loans as securities and label them as secure.

Since selling the loan to duped investors meant the bankers would receive the money for the loan before it was paid back, their path to maximizing profits involved handing out as many loans as possible.

The banks were only as successful as the amount of loans they issued. To achieve this, they began to sell loans to virtually any customer with a social security number. The rating agencies, who were established to rate such securities, surprisingly granted the majority of these exotic investments a AAA rating.

The truth was that these loans were extremely risky. The banks knew it, and so did the regulatory agencies. Yet unfortunately, investors did not know this, and found these investments to be a great bargain. They were secure, and provided a high return on assets.
     
The failure of the rating agencies to rate these risky loans accordingly also stems from flawed incentives. For the most part, these agencies were paid by the banks. Thus, each of the agencies competed for these funds by rating their investments favorably.

The widespread use of securitization and its abuse in fact betrayed its initial purpose. Securitization was meant to spread risk so that an assiduous bank would not suffer from factors that they were not involved in. Ironically, the very aim of securitization led to its downfall. So many banks adopted this highly profitable and highly risky method of business, that the risk had been spread to the point where good banks were in fact hindered by extraneous factors.

Securitization serves absolutely no purpose in society. Banks must learn that maximizing profits must involve ethical practices. Securitization promotes the very opposite of this, and it is why we must rid ourselves of this inherently flawed method.

Increase regulation: This point should be a given yet unfortunately it seems there remains an ensuing debate regarding its implementation. I will not dwell on this topic for too long, as I have already discussed the majority of the points regarding this topic in my article on the crisis itself. I will say this though. Regulation establishes rules that must be abided by.

There is a reason why there is the existence of such rules. They place restrictions on what can and cannot be done. History has shown us that without the existence of such rules there becomes the tendency to commit unethical infractions. A prime example would be the implementation of child labor. If laws hadn't been instituted outlawing child labor, companies would still be exploiting it.

The FDA is another example, and there are countless others. Basically, rules exist because they are necessary. The argument that a reduction in regulation will lead to a more robust economy is the same fallacious assumption that has been proven wrong countless times.

Even if it does increase economic output it decreases Americans' level of freedom which is a terrible trade-off. We currently have a shortage of regulations in our country. To promote the safety, fairness, and well being of capitalism and those under its system, we must impose regulations to ensure just that.

Welfare: This will be by far the longest section as it comprises the majority of my propositions. Like Robert Reich, I am in favor of a reverse tax. However, I have my own ideas on its implementation and integration in our overlying economic system.

The philosopher John Rawls once stated that a society must be conducted such that the absolute worst circumstance one can be in a society is bearable. I agree with this statement, and think it is essential for the establishment of a fair society. However, he also noted that inequality is often beneficial for society, and so it should be maintained for that sole purpose.

Under this system a clear, well established, impermeable poverty line is to be set by the government. This line is to be determined by economists who calculate the cost of living in the United States and ensure that every member in society will at least survive with the bare minimum. In order to ensure that this poverty line is not breached, the reverse tax must be implemented.

It works as follows: There will be a set poverty line that is to have already been established. Unlike the unemployment system, or tax cuts which redistribute money indirectly, this will be a direct method of redistribution. If an individual is under the poverty line, they will be given funds by the government to ensure that they do not fall bellow this level.

Let us assume for practical purposes that the poverty line for an individual is $15k. Theoretically, no citizen should be allowed below this threshold. So if an individual makes $0 yearly, they will end the year with $15. This method will probably receive criticism and will be lambasted as an easy way out for lazy citizens. Although I happen to believe that citizens do not consciously choose to be poor, I acknowledge that government help can prove problematic and can provide for a lack of incentive.

In order to remedy this, we ensure that a citizen who opts for an otherwise unsatisfactory job is adequately compensated. I could spend the ensuing paragraphs explaining a highly abstract concept, but instead I will provide graphs, after which I will provide corresponding explanations. Simply keep in mind that the entire purpose of such a convoluted system is to provide incentive, especially for unsatisfactory jobs(which are currently the most plentiful.)

 Represented above is a chart displaying the implementation of the reverse tax. If a citizen makes absolutely nothing, they will be have an EE(eventual earning) of 15k. However, if someone decides to take a sub-par job that pays a paltry 10k a year, they will have an eventual earning of $18.3k.

The idea is that the individual who decided to take an unsatisfactory job is rewarded and makes more than the individual who does nothing. This provides incentive for even a recently fired white collar worker to temporarily accept a low paying job because of the financial incentive.

The chart also displays two clear and vital trends. The EE correlates with the IE(initial earnings), and the government contribution has an inverse correlation with the IE. In short, the citizen makes more money the higher job they take, and the government's contribution steadily decreases as the IE increases.

When a citizen makes 0k, the government contributes 15k, but when a citizen makes 12k, the government contributes 7k. This contribution continues on its downward trajectory until 22k, at which point the government stops redistributing wealth.

What is crucial to keep in mind is that at no point is it more financially rewarding to accept government aid. This creates for a system in which the government continues to help citizens but does not lessen the incentive to seek and keep work.

Since methods of redistribution will be direct, several government roles can be demolished. Unemployment benefits will no longer be necessary as a result of the direct redistribution. The costly and often ineffective institutions of Social Security, Medicare, Medicaid, and more recently ObamaCare will also be superfluous.

Social Security will not be needed because of direct redistribution.(Redistribution for seniors will be nuanced, but will work much like the general redistribution system I have proposed. I have not devised a plan for retirees as of yet.)

Despite the demolition of programs that offer Universal healthcare, the healthcare system will become nationalized. Personally, I happen to believe that medical care is an area that should always be handled by the government. The goal of a corporation is to make profits, and the the goal of medical company must be to care for its patients. These are two contradicting goals which highlights why the government should run our health care system.

A nationalized healthcare system does not require Universal health care however, and citizens will still have the choice to purchase medical care if they want to. However, unlike the current system, each citizen will have choice on whether they wish to purchase medical care. In calculating the safety net, economists will take into account the cost of medical care and ensure that even those at the poverty line can afford it.

In order to ensure that the brunt of the cost does not lie with the government; (since the health care system will be nationalized) Healthcare will run much like the USPS. It will function like a business and attempt to balance its books, but it will do so with the realization that in areas like healthcare people come before profits. Such is the system that can solve many of the omnipresent problems in our flawed healthcare system.

The Employment Bureau: This expansive welfare system will lead many to berate it for it socialistic aspects. They will point out that one may very well choose to live with the bare minimum, with their basic necessities guaranteed.

Although this problem has been addressed slightly through the utilization of incentive, it unfortunately remains. In order to eradicate such an option for straddlers, the government must play an active role in ensuring that its citizens are actively pursuing jobs. The only way in which this can be successfully implemented is through the establishment of a government institution that does just that. This institution is to be titled, the Employment Bureau.

The Employment Bureau is to be tasked with two primary jobs. It will ensure that citizens who are unemployed are actively seeking work, and it will help unemployed citizens find work. These seem like difficult goals to achieve, but through the employment bureau, they are achievable.

High schools hire what are called counselors. These counselors are tasked with various jobs. Among these jobs is to help their students through the high school experience. Counselors must ensure that their students are on track for graduation, and that they are maximizing their chances at going to college. The Employment Bureau will accomplish much of the same tasks, but will do so in a differing context. 

The Employment Bureau will simply comprise of a reminiscent system. The government will hire counselors who will have the sole job of monitoring the progress of the Unemployed. They must simultaneously ensure that efforts to find a job are sincere, and they must aid citizens in their search.

In order to reduce government costs, these counselors can operate in existing government facilities, like police stations, courts, and city halls. If the government does indeed wish to augment its infrastructure spending, it may create independent government facilities for the Employment Bureau. This trivial detail can be dealt with as is seen fit.

When a high school sees a boost in enrollment, its counselors often feel overwhelmed. Likewise, during difficult economic times, officials at the Bureau will also feel overwhelmed. In order to mitigate this effect, the Government must hire part time counselors to work for the Employment Bureau when there is an increase in demand.

This will serve two purposes. It will ensure that the Bureau remains effective when it is most needed, and it will slightly mitigate the effects of an ailing economy by augmenting its workforce during lean economic times.

The modus operandi for this institution will be more or less what one would expect. However, there are a few nuanced aspects that must be kept in mind to ensure the Employment Bureau's effectiveness. It must meet with unemployed members frequently enough to remain aware of developments.

I would recommend a time period no longer than once a month. Then, it must also retain its regulatory purpose, while remaining a benevolent organization. The primary purpose of the Employment Bureau will be to help the unemployed find work. However, it must also ensure that citizens are not taking the easy way out.

Unemployed citizens will be given meeting times that will be scheduled by the Bureau itself. If a citizen cannot make it to this meeting, they must notify the Bureau and reschedule. If a citizen misses more than one meeting with not communication, they will subsequently lose the privilege of remaining above the poverty line.

Thus, the only way in which a citizen can breach the poverty line is through a self-inflicted wound. However, the assumption is that no individual will do such a thing to themselves, and as a result we will be left with a society in which each of its members have the right to live a bearable life.

Taxation: Naturally the taxation system will be progressive, and will require wealthier individuals to give back to the society that made them who they are. Taxation will be conducted based on affordability. Simply put, the rich must pay more taxes. This is not a result of a vehement attack the rich but rather the realization that the rich can afford to pay more in taxes, and should.

I highly disagree with the concept of tax brackets. This is because each individual is in a unique situation based on their income and thus should not be grouped with a group of people who make a similar income. Thus, I am in support of a rolling bracket, in which the tax rate increases progressively as the income increases.

Since I am not a mathematician, I do not know of a formula that will achieve this but I assume one can be created. This would largely solve the prevalent issue in the United States that a member of the upper-middle class pays the same rate as a member of the upper echelons of society. Furthermore, it will achieve the main goal, which is the calculation of taxes based on affordability. 

Close Loopholes: This point should be quite apparent, but I wish to include it simply to stress its important. Ostensibly, it appears as if we have a progressive taxation system. However, once one looks at the actual data, it overwhelmingly proves that the innumerable amount of tax cuts have provided for a system in which many very wealthy Americans are paying less taxes as a percentage of their income as members of the middle class. This is simply perverse, and must be remedied, hopefully through the implementation of the reverse tax.


The Government cannot fire workers during a fragile economy: This should also be readily apparent, but when the American economy is contracting, or is enduring a fragile recovery, there is no discernible reason as to why the Government should cut jobs. Even if the government insists on making budget cuts during a downward economy, these cuts should never include the firing of government workers. When an economy is sputtering, the entire efforts of the government should be focused on improving the economy. The government must not exacerbate this problem by cutting jobs during a weak economic climate.

A Nuanced solution to Outsourcing: The very nature of the problem of outsourcing lies in the idea of incentive. Corporations often have the sole aim of making profits, and will do what is necessary to maximize profits. The United States has become a developed country in which wages have risen to unprecedented levels.

Unfortunately, the unintended consequence of this is that corporations can now go to foreign countries for cheap labor. This is only natural. If a corporation can find a way to maximize profits and minimize expenditures it can and should take it. The notion that corporations should "take one for the team(The US)" and continue to hire American workers with no financial incentive is fallacious, and we must understand that it is not viable.

Lamentably, there is yet another point we must keep in mind about outsourcing: there is no clear solution. Politicians do not like to admit this because it lessens their chances at winning elections, but it is invariably true. Logically, there are a few solutions, but these fail the test of viability.

We could take measures that will reduce American wages to compete with developing nations, but this is a step backward not forward. We could also subsidize American jobs such that a corporation hiring an American worker will receive enough compensation to the point where they will be more financially lucrative in the United States.

However, this is counter-intuitive to the idea of free enterprise that we Americans espouse and would be far too costly. However, we can take measures that will at least allow us to gain from outsourcing practices that are hurting our country.

American workers are taxed on their income, and these taxes are often unavoidable. Such is the cost for living in a great country like the United States. The very idea of paying taxes is that a citizen gives back to the country that protects and enhances their life.

When an American Corporation employs foreign citizens in other countries, they too owe something to the American entity. However, it is not allowed to tax those citizens because they are not natural citizens. Thus, the Corporations should be taxed precisely because they are benefiting from the utilization of cheap labor.

Essentially, the Corporation is taxed because it is making the choice to extend American Enterprise to a foreign nation, and it is unfair that natural citizens should pay taxes on this benefit yet foreign citizens remain unaccounted for.

Thus, the simple solution is to tax foreign workers American rates but ask for the corporations to pay those taxes. This ensures that the United States receives compensation for lost jobs and that these citizens are recognized as an extension of the American workforce. This provides incentive for corporations to hire in the United States namely because US citizens pay their own taxes.

Corporations must also be held accountable for their decision to hire foreign citizens. Since they make the choice to further their profits by exploiting foreign workers, they must realize that this is not tantamount to hiring citizens of the United States. Perhaps the way in which Corporations benefit the most from foreign labor is an increase in profit margins. If Nike exports jobs to Indonesia to make jerseys, they may pay around a dollar for the production of each jersey. However, they decide to sell the same jersey for around $100 dollars.

In response, the United States should impose a protective tariff for the production of goods outside the United States. If a company decides to hire US workers and sell a product in the US, they will be asked to pay a lower tax rate. However, if a corporation employs foreign workers, they will be taxed a higher tax rate. The idea is that this creates for an incentive to hire in the United States, namely a lower tax rate.

The United States has a widely coveted consumer market, one that should not be taken for granted. If an American corporation wishes to add value to a foreign country, it must make up for this by adding value through the United States, precisely through a higher tax rate.

Then, if an American corporation seeks elsewhere to sell its products, it will realize that it will be taxed on foreign expenditures as well. If a corporation wishes to sell its products in China because of a lower tax rate, it will realize that its expenditures in China will also be subject to taxation from the United States as well.

In short, the aims of these measures are to create a situation in which the most lucrative situation is the make and sell products in the United States, and this should boost the United States Economy.

Corporations have also decided to hold their cash elsewhere, and this is also detrimental to business in the United States. Many of these corporations retain this cash in foreign countries in search of tax havens. A United States corporation must invest its money in the United States, and if it does not keep the money in the US it cannot invest it there.

Thus, corporations must be taxed for foreign assets. Essentially, they will be taxed to the point where it becomes more financially sound to return their money to the United States. This policy will be much more effective than the widely criticized 2004.(Why should Corporations be rewarded for tax evasion?)

The effects of these measures will be a clear increase in revenue, an uptick in hiring, an uptick in business in the United States, and a system in which fairness is achieved.

It's the government's fault: An alternative way at viewing the causes of the Great Recession of 2008

Introduction

The recent economic crisis of 2008 has left many puzzled Americans wondering what exactly went wrong. How could a sudden collapse of our economic system happen so abruptly, so brutally, and so unexpectedly? Hadn’t we mastered our economic system, and in the words of University of Chicago Professor Robert Lucas, “solved the problem of depression-prevention economics”? (Depression economics, Paul Krugman pg. 9) Where was the market’s free hand? These and other compelling questions have vexed even the most intelligent Americans. To this day, the answers have been conflicting, inconsistent, and often contentious.

The United States has thankfully avoided a Depression, and has instead experienced the worst recession in its history. Although the recession is officially over, American citizens continue to suffer. This talk of a recession leads to a pressing question. What is a recession? Well in laymen terms, a recession is a marked decrease in economic activity over a significant period of time. Recessions are considered a normal segment of the business cycle; however, there was nothing mundane about the latest recession of 2008.

The fervent search for answers that has ensued is especially significant. Once our economic problems are fully comprehended, measures can be taken to prevent a repeat of the same mistakes. The Great Depression taught economists a great deal about the field of economics and led to the rise of macroeconomic theory. Through this they learned several lessons that prevented a repeat for 80 years. The hope is that the latest crisis will provide the correct answers so that a repeat does not occur for a significant period of time. This requires that we find the correct answers, however, and that is the purpose of this paper. To find the answers to questions that have befuddled Americans since the wake of our crisis in 2008. So, what were the reasons for the economic meltdown of 2008?

It is widely believed that the Government is to blame for our current economic problems. That conviction is true. However, it is the lack of government intervention in our economy and its perverse policies leading up to 2008 which failed to avert our grave crisis. There are of course several other reasons for the recent cataclysmic fall in the economy, but for the most part these also stemmed from a failure on the part of the government.

In this paper, the causes for the crisis will be primarily examined whereas the crisis itself and its results will largely be ignored. The crisis itself is assumed to be more or less common knowledge but its causes are what are up for rigorous debate.

The Makings of a new Economy

In the late 1970s, the United States was suffering from a bad case of stagflation that was threatening to provide a serious threat to its recent prosperity. Many Americans had grown tired of current administrations and seemed ready for a profound shift in political and economic policy. Reagan, with his avocation of a new brand of “Supply Side economics” garnered substantial popularity that was revered by many as the new way forward. Reagan and his advocates successfully convinced the American public that this new administration would not only aid the middle class but transform America.

What is “Supply side economics”? How did it transform the American economy? Lastly, how is this relevant to an event that occurred nearly 30 years later? Well, “Supply Side economics”, also referred to as “Reaganomics” was a set of ideals that Reagan imposed or at least attempted to impose during his presidency. These were namely, a reduction in taxes for the upper echelons of society, a reduction in the size of government, Deregulation of corporations and business institutions, and a reduction in inflation and unemployment. Government was perceived to be the problem and in turn its powers would need to be decapitated under Reagan’s reign. This view still constitutes a major portion of modern conservative beliefs and serves as vindication for Reagan’s lasting legacy.

The pro business rhetoric that dominated much of Reagan’s propositions eventually hampered business, with the focus on short term profits that induced a plethora of mergers. (Merger Mania, Ch. 6, The man who sold the world) The implications of these mergers caused several problems for American business. With the new mentality of short term profits, companies began to cut corners, and no longer cared about a long term outlook. Many economists attribute this as the reason why American companies no longer retained the edge they once had over recovering German and Japanese economies. The fix for short term profits which would subsequently lead to a rise in stock prices created an economy where companies were no longer investing in new technology. These businesses that successfully completed their coups of other companies did so with mostly borrowed funds. This created another problem in that the company was no sounder after the merger than it was before. The advocacy of mergers, which then led to monopolies, also contained a paradox. Reagan, the advocate of small business and entrepreneurship, in fact hampered the advance of small businesses with his disregard towards monopolies.

The American middle class and lower class were also hindered by these developments in Reagan’s powerful scheme. The level of Poverty rose each year from 1981-1992. 80% of income gains since 1980 have gone to the top 1%. Middle class income has remained relatively stagnant since 1970. The middle class has not grown since Reagan’s insistence that tax cuts for the wealthy would aid all of America. In fact, it has seen a marked decline which seriously questions the validity of Reagan’s often contentious propositions.

There is no question that Reagan was one of the most influential presidents in America’s history. His economic foundation helped drive the American economy over the past thirty years. Alan Greenspan, the Federal reserve Chairman, appointed in 1987 by Reagan himself carried out Reagan’s policies well into the 21^st century. Not only did many of Reagan’s promises not come to fruition, but his influence paved way for the makings of a new economy, one that was doomed due to its flawed ideology. And that is why the comprehension of Reaganomics and its impact is of cardinal importance to any studying the Great Recession.

The not so free economy

While the United States has presided over what may closely be described as a free market, there is disconcerting evidence that points to the contrary. It is true; the Government has largely stayed out of the way of corporations. They have been provided with unprecedented freedom that was supposed to nurture competition and encourage innovation. There is one problem with free markets though. The discretion provided to the corporations and lack of regulation leads to their realization that they can maximize profits by breaching the rules. They and other companies that eventually feel obliged to partake in such malpractices eventually cause what is known as a monopoly, and if not a monopoly, at least an oligopoly. Due to the lack of regulation, the consumer suffers, because of a lack of viable options. Even the options they have are severely limited, because the goods they consume were made with profits in mind. In short, in a free system the consumer is not free. Free market proponents would argue, however, that this ushers small businesses that provide healthy alternatives. However, once a monopoly is established in the market, small businesses never get going and either fail, stay small, or get acquired.

Why Did We Have to go Through This?

            The previous information has simply served as a backdrop for our current situation. Neither of these are reasons why the 2008 crisis happened. Rather they are explanations of how the recent and appalling occurrences were possible. Now, there are several reasons why the economy floundered. There is not one sole reason to blame, and in complex situations like these, there hardly ever is. However, if deconstructed, one can indeed deduce the facilitator for the problems faced. While one cannot blame the government for the crisis directly, it can be perceived as the neglecting parents who failed to discipline their children. They placed far too much trust in their child (the economy), and now their child has gotten itself into trouble.

Now this analogy, though partially true, makes the government appear much too benign. Wasn’t it the government that reduced rates for higher tax brackets that was partly the reason for such startling inequality, and dangerous deficits? Wasn’t it the Supreme Court that just recently ruled that corporations are viewed as people by the court? Wasn’t it the Federal Reserve that kept interest rates low when the economy was heating up? So in fact, the government is much like the lazy parent who provides their overweight child ice cream for lunch, because they do not want to force them into losing weight much less cook a healthy meal. So, what were the reasons for our unfortunate crisis?

1.      Lack of government intervention: The first one is obvious as it is in fact the premise of this paper. However, it does deserve scrutiny for its significance. The movement towards deregulation was a mass movement initiated by several free-market economists such as Milton Friedman, F.A Hayek, Ayn Rand, and several others. This movement picked up steam and became more prevalent towards the late 1970’s. The vehement attack against regulation argued that it was holding back American institutions and stifling innovation and growth. Markets, they advocated, would work best unfettered, because the market would eventually take care of itself.

Why this new group of dissenting economists would hold this view is slightly puzzling. Not only had the economy been growing steadily since World War 2, when heavy regulation was indeed in place, but the cost of regulation had been relatively miniscule, when compared to its apparent benefits. In the words of Joseph Stiglitz, “the costs of a mistake are thousands of times greater than the extra costs of enforcement. (Freefall, pg. 179) Nevertheless, they got their way, and even the liberal Carter began to reduce Regulatory measures in the economy. When Reagan assumed the presidency, this movement had only been exacerbated. Reagan in fact helped in not only in proposing deregulatory legislation, but in appointing officials that were clearly against regulation to the Federal Reserve, and SEC and other regulatory institutions.(The Man Who Sold the World) This not only severely hindered the abilities of regulatory institutions, but in essence rendered these institutions useless.

Reagan’s successors Bush Sr., Clinton, and George Bush continued this trend in the belief that the economy is best left alone. 

Now it must be understood why Deregulation has the perverse effects it has, and what infringements were committed on the part of the government.

The issue with deregulation is that it provides the wrong incentives. The nature of business is that it is conducted with profits in mind. There are several ways to maximize profits. Among these are several quite dubious methods such as cutting corners, underpaying workers, and several other malpractices. The biggest problem with deregulation is that it assumes corporations and business organizations are disciplined enough to prevent themselves from committing something unethical, which if committed would increase their profits and make their company appear more lucrative, while at the same time be completely ignored by incompetent regulatory institutions. If analyzed carefully, it is quite evident this ideology is flawed, and it is clear why it failed.

Now that the negative aspects of deregulation have been explained, examples of the impact of deregulation must also be examined.

Perhaps the most publicized effects of deregulation are attributed to the failure to regulate the financial sector. Not only were standing regulatory measures largely ignored by the Federal Reserve, but new Regulatory measures were never devised for exotic investments such as Credit Default Swaps, CDO’s, and derivatives. These so called “innovative” investments were never touched upon by regulatory measures and it is no wonder they failed miserably. The failure on the part of the government to recognize the potential danger of such assets and regulate them was a direct reason for the financial crash. If the government had kept such investments in check, they would not have grown into the colossus they were, and their impact would have been greatly reduced. In fact, many of these “innovative” methods should have been outlawed outright due to the fact that many do not even serve a purpose. They simply turned Wall Street into a high stakes casino that was getting more and more dangerous as time passed. (Deregulation and the financial crisis, Freefall)

Another regulatory failure can be found in the repeal of the Glass-Steagall act in 1999 which eroded the line between investment banks and commercial banks. This ensured that already big banks could become bigger, and that commercial banks could now take the exorbitant risks once taken exclusively by investment banks.

Rating agencies were also to blame for failing to warn investors of risky investments. These agencies are also a good example of flawed incentives because many were paid by the banks themselves. Since several of them competed for these funds the rating agency that seemed most favorable to the bankers would be the most successful. This should have been apparent to regulators but instead they insisted that the rating agencies were responsible enough to make sound decisions. (Freefall, Ch.6)

Instead of realizing that the economy was heating up and that there was a housing bubble (Alan Greenspan actually denied the existence of such a bubble up until the crash), the Federal Reserve reduced interest rates. There were many issues with this. Firstly, interest rates are used to increase or decrease liquidity in an economy. When there is a decrease in liquidity, the Fed lowers rates to spur spending, and when the economy heats up, the Fed raises rates to prevent inflation and the bursting of a bubble. To lower interest rates when the economy is heating up is paradoxical, and it is puzzling why Alan Greenspan would opt for such a measure. According to William McChesney Martin, Chairman of the Federal Reserve for 19 years, the Federal Reserve’s job was ''to take away the punch bowl just when the party gets going.'' (NY Times) Alan Greenspan provided more punch to make sure the party became even more boisterous. All that sugar leads to a crash eventually, and it is no surprise that our party crashed miserably.

It is clear that over the past thirty years Government officials had all been in cahoots in terms of regulation. Less meant more. Nothing was the best. This anti-regulatory mantra indeed led to a system with flawed incentives. We had been convinced that banks were mature enough to self regulate themselves. They would never give in to the temptation to maximize profits and do so unscathed. Not only is that an oxymoron, but it has proven to be a fallacious assumption.

2.      Too big to fail: This issue is indeed partially a regulatory problem, but it deserves its own mention. There is a reason why the Economists are wary of corporations that are too big to fail. Too big to fail creates a moral hazard for the corporation, is a cause for systemic risk, and leads to a monopoly. Apart from these effects mentioned above, it must be comprehended why too big to fail is dangerous, how it pertains to the economic crisis of 2008, and why regulatory agencies refused to deal with the issue.

When a company is too big to fail, it obviously realizes that its fate has a direct impact on the fate of others. As a result, the company begins to act carelessly and erroneously to increase profits, knowing full well that the government will not allow them to fail. Since a free market begets monopolies, it is no wonder that our quasi-free market was littered with such monopolies that contained dangerously big companies. Once it is too big, not only does this company act irresponsibly, but it is too big to be challenged as well. Causing a severe problem for the little guy, workers, small businesses, consumers etc. If you are too big to fail you are too big to be challenged.

The other problem with too big to fail, is that the actions of one, or some impact the wellbeing of all. This is what happened in 2008 with the financial crisis and is why the tax payer was forced into bailing these corporations out. Their failure would lead to the failure of the rest of the country.

The sane response is for the government to recognize this and impose limitations on such problems from arising. Much like the antitrust laws of the progressive era imposed by Teddy Roosevelt and Taft. However, the government did the opposite and even allowed threatening mergers to occur. To them, it would be far much better to leave things alone as long as everything was going up, including the size of dangerously large corporations. Reducing their size would be a hassle and as long as everything was going up, there was no need to worry. However, what goes up must come down.

3.      The Mortgage Debacle: Much of this was also covered by the section on deregulation, but there are some aspects that must be elucidated on. These are namely, securitization, and banking/mortgage malpractices such as predatory lending.

Securitization is the practice of consolidating groups of debt obligations, packaging them up, and selling them as investments. This popular practice is a deviation from standard banking where banks would issue a loan, and keep it. In this system, banks had the incentive to issue loans to worthy candidates, because they would ultimately be paid back. With this new method, banks were no longer concerned with the quality of a loan because they would be sold as an investment regardless. With faulty ratings from ratings companies, risky loans were classified as safe and these loans were sold all around the world.

Predatory lending practices and faulty banking practices also led to the financial crisis. Since Banks no longer cared about the whereabouts of their loans, they began to hand mortgages to anyone with a social security. Some critics blame irresponsible consumers for this. However, who should be at blame for this? Ignorant, helpless consumers or the bankers who insisted that all would be well as long as home prices rose exponentially knowing full well the risk of such lending practices. It is no wonder eventually the speculation on housing prices eventually reached a crescendo, after which home prices dropped and many Americans found themselves with an underwater home.

The reasons for the financial crash itself also involved the shady practices committed by bankers. Practices such as risky leveraging increased risk exponentially and would dully increase profits, as long as the value of everything continued to skyrocket. The banks in the small country of Ireland leveraged to such an extent that the entire country transformed from a success story into a disaster. It is this shortsightedness and obsession with short-term profits that caused bankers to behave so irrationally. These exorbitant risks taken by banks were also highlighting their inability to regulate themselves, thus calling for the existence of an overseeing authority. According to Joseph Stiglitz, “Bankers are born no greedier than the rest of us.” It is the government however, that willingly allows bankers to act upon their natural instinct, and instead of curbing it, exacerbates it.

4.      Income disparity: Several economists such as Robert Reich and Raghuram Rajan have pointed to income disparity as one of the primary reasons for the Great Recession. In saying this, they are indeed correct. What they do not focus on enough however, is how the government paved the way for such levels of disparity.

As Robert Reich himself noted, the problem with income inequality is not only an issue of fairness, but it is an issue of pure economics. The reason why large concentrations of wealth are unsustainable is because rich people tend to save money. Not only do they save but even the ones who spend have so much that it would be impossible to spend it all. This is all money that is not reaching circulation and thus fails to stimulate the economy. The reason why government tax cuts to the wealthy have consistently failed to create jobs is because the wealthy save the majority of their tax cuts. (Aftershock)

As has already been noted, wages for middle class men have been stagnant since Reagan assumed the presidency. How has the economy been able to achieve sustainable growth during this period? Well, basically, Americans stopped saving and started borrowing. For the past thirty years, Americans have been living beyond their means, and eventually this reached its saturation point, hence our current economic crisis.

Since the middle class is the primary consumer of produced goods, then they must be sustained in order to consume what is produced. If the middle class is sputtering, and corporations continue to grow and increase their supply, then eventually the supply outstrips the demand, and the country enters a recession. Such an example can be found in the Great Depression with the demise of farming. In fact, one of the biggest and least acknowledged bubbles is that the American consumers no longer had the means to purchase the products that were being produced. Thus, it can be deduced that an economy is not truly healthy unless its middle class is growing in accordance with the growth of its nation.

Even the staunchest Free-market capitalists would be forced to admit that pure capitalism begets inequality. Since a healthy economy is not sustainable with widening levels of inequality, how is it that pure capitalism is the answer to what ails us?

The issue of income disparity is in fact one in which the Government’s perverse policies are directly to blame. The catering to the rich and wealthy that has transpired in Washington is appalling, and begs to question if the current government actually is for the people by the people. The plethora of tax cuts gifted to those who can full well afford to pay it is appalling, and as a result have lead to the widening chasm between the rich and the poor. Deteriorating social safety nets have been a direct result of the lower amount of revenue collected. The less taxes are collected to support these safety nets, the more inequality rises, and the more people begin to fall below the poverty line. Then, to “stimulate” the economy, more tax cuts are given to the wealthy which exacerbates the vicious cycle. The rich get richer, the poor get poorer, and our economy suffers. (Of the 1% for the 1% by the 1%, Paul Krugman)

Conclusion

The ensuing economic turmoil that was a direct result of these causes is more or less common knowledge. The housing bubble collapsed in 2007, and later in 2008 banks began to feel the pressure. Bear Stearns endured a near death experience, Lehman brothers did die, and many other financial institutions were bailed out. The resulting contagion was not necessarily anything anyone could stop at the time. The damage had been done, and the effects were finally coming to fruition. The fed moved expeditiously, and as a result the economy was put on life support, where it has been for the past 3 or so odd years. Now that the damage has been done, it is time to reminisce about what has transpired. The American people need answers just as dearly as do the economists. However, if they look closely enough, they must realize that we need to improve the function of our ailing government to improve the anemic growth of our economy. The sooner the Government is coerced into improving its policies, the sooner the Economic Crash of 2008 becomes nothing but a fleeting memory, albeit a painful one.

Inspiring quotes

1. "To every problem there is a solution, and to every solution there is a problem"-Yousuf Hafuda
2. "Ask not what your country can do for you but what you can do for your country"-JFK
3. "a child miseducated is a child lost"-JFK
4. "Success is getting what you want, happiness is wanting what you get."-Dale Carnegie
5. "Happiness is a way of travel, not a destination"-unknown
6. "Will Manchester United score, Manchester United always score"-English commentator
7. "Change is the law of life. And those who look only to the past or present are certain to miss the future." JFK 
8. "Communism has never come to power in a country that was not disrupted by war or corruption, or both" JFK 
9. "Forgive your enemies, but never forget their names." JFK
10. "Fountains have the ability to rise above people, people have the ability to create fountains that rise above them."-Yousuf Hafuda
11. "Once logic is lost, there is no longer a basis for a sound argument"-Yousuf Hafuda
12. "The only thing we have to fear, is fear itself" FDR
13. "If you want your life to change, do something."-Yousuf Hafuda 
14. "The problem is not that the rich spend too much, but that they have too much money to spend."-Yousuf Hafuda
15. "The rise of corporations leads to the rise in consumerism, which then leads to the attempt to stupidify the public."-Yousuf Hafuda
16. "The American public does not want the truth, and so, it is lied to."-Yousuf Hafuda
17. "He who enjoys life is infinitely happier than he who ponders his happiness"-Yousuf Hafuda
18. "Insanity: doing the same thing over and over again expecting different results."- Albert Einstein 
19. "We cannot solve our problems with the same thinking we used to create them."-Albert Einstein
20. "Some of the worst decisions are made with the most consideration."-Yousuf Hafuda
21. "Debates do not stem from Agreement."-Yousuf Hafuda
22. "Nothing is something, because for nothing to be nothing, it has to be something."-Yousuf Hafuda
23. " If the economy is only healthy for those at the top, then the economy is in fact unhealthy."-Yousuf Hafuda
24. "Absence of evidence is not evidence of Absence."-Carl Sagan
25. "Everything stems from simplicity."-Yousuf Hafuda
26. "Have a vision for the future and live life by the moment."-Yousuf Hafuda
27. "Diversity is an elusive term. We are all diverse in our own way."-Yousuf Hafuda 
28. "I balk at incompetence because I believe everyone is competent." -Yousuf Hafuda
29. "There are pessimists, and there are optimists, but everyone thinks they are a realist"-Yousuf Hafuda
30. "When the past does not corroborate the present, the future becomes difficult to envisage"-Yousuf Hafuda
31. "It is better to be proved incorrect than to never know what is correct."-Yousuf Hafuda

Super Freakonomics: A Super Review for a Super book

SuperFreakonomics is the second installment in the Freakonomics series written by the highly esteemed economists Steven D. Levitt and Dubner. In their popular book, the authors delve into unique subjects not touched upon by traditional, or contemporary economists. Much of their work stems from the relatively new field of behavioral economics, though the issues covered are often unique and quirky. The book is relayed in an entertaining manner and can be easily comprehended. The completion of this book, unlike others in its field of study, is surprisingly enjoyable.

The content of the SuperFreakonomics is pleasantly fresh and covers enthralling topics. The subjects vary yet each offers pioneer research and study conducted by the two authors of the book. The topics range from prostitution, to the innate nature of human beings. Global warming is discussed, and terrorism is also examined. In each of the topics provided comprehensive research has been conducted. The results of this research are often startling, and its implications alone beg for the book to be read. This unconventional book entertains in a topic that is often considered banal. It should be picked up by any interested in furthering their repertoire in life, because that is exactly what SuperFreakonomics examines. It is for this reason, and for pure entertainment purposes, that it is imperative anyone who comes across this book reads it.

Overall rating: 96

“Reaganomics” and the Decline of the American Middle Class.

 Key Terms
Stagflation- rising unemployment and inflation Largely prevalent throughout the 70s
Gdp- The market value of all the goods and services produced in a country in a given period of time.
Recession- A slowdown of economic activity in a given country.
Inflation/deflation-A rise of prices of goods in a country over a period of time. Generally measured by the consumer price index. Inflation was a big problem in the 70s. Deflation is the opposite of inflation
Deregulation-The reduction of government control on how business is done. This ideology was widely introduced by the Reagan administration and is still a large portion of modern conservatism.
Free market economy- All markets within the economy are not regulated by anyone other than the players in that specific market. This system advocates against government intervention and believes that the market will work its own problems out. Price is largely determined by supply and demand. Reminiscent of Laissez-faire economics.
Concentration of wealth-  The amount of wealth owned by the top portions of the American society. Since the 1980s the wealth at the top has become more and more concentrated.
Supply side economics- The belief that economic growth is achieved by reducing taxes for those who produce the goods. Theoretically, the greater supply of goods lowers prices and eventually benefits the consumer.
Laffer Curve- The relationship between government revenue from taxation and their rates, the representation is used by the promoters of supply side economics. The system argues that if taxes are too high the wealthy cease to have motivation to innovate and make more money
Trickle down economics- An alternative way to refer to supply-side economics
Keynesian economics- essentially the opposite of Supply-side economics.
“Reaganomics”- An economic plan that was reminiscent to supply side economics but focused on reducing growth of government spending, reduce income tax and capital gains tax, reduce government regulation, control the money supply to reduce inflation.
Causes

In the late seventies, during the Carter administration, the American economy was suffering from a period of stagflation, and many other issues that were a result of policies in previous administrations. The American public had grown tired of international issues such as the Vietnam war and the Arab Oil embargo, which were proving detrimental to American society. American voters were ready for a shift in economic policies and were ready for a change. The previously liberal base that had dominated the political scene since World War 2 was soon to receive a staunch challenge in the form of Ronald Reagan. In the election of 1980, Reagan made constant appeals to the common man, and often spoke of his small town roots from Dixon, California. Reagan promised a profound shift in economic policy with his inception of Reaganomics. According to him, these wholesale changes would prove beneficial to the American middle class. Relying on his acting abilities, Reagan successfully sold these ideals to the American public and convinced them that “Reaganomics” was the correct route. At the polls, Reagan won by a landslide 489-49 electoral votes and entered the presidency riding a wave of popularity and widespread optimism. Through his victory, America entered a new era of Conservatism that would last for over 20 years.

Once elected into the presidency, Reagan began the implementation of his policies. Chiefly being his economic system, sensibly named “Reaganomics”. Through this system Reagan advocated a number of ideals that he sincerely believed would reduce the rising inflation and unemployment rates in the 1970s. Reagan’s system was largely structured on what can now be referred to as modern-conservative ideals. These stemmed from the beliefs of preceding economists. “Reaganomics” was simply a combined iteration of free market policy schemes. Milton Friedman and many other prominent economists at the time had already begun their avocation of such policies. These included the firm belief that “Supply creates its own demand” and that economic growth is only possible if the Supplier can create more products for the consumer. This is supposedly beneficial for the consumer, as in theory it stimulates competition which helps those purchasing the products. This shift in thought became prevalent towards the late 1970s and marked a significant shift from Keynesian economics which was essentially the opposite of Supply side economics.

The culmination of the multitude of free-market ideas presented itself through “Reaganomics” which was the premise for Reagan’s presidential campaign. This ideal, devised by Reagan himself, included four major beliefs, which were supplemented by other beliefs. Reaganomics advocated the reduction of government spending, the reduction of income taxes, the reduction of regulation, and the reduction of inflation. Already noticeable is the term reduce, which was a prime portion of Reagan’s overall scheme. The belief was that with this reduction, more economic freedom would be achieved. Government was seen as the source of the problem and its reduction comprised a large part of Reagan’s beliefs.

Reagan strongly believed in the reduction of government spending. He thought that government was the problem, and thus set out to greatly limited it. According to Reagan, “Governments tend not to solve problems, only to rearrange them”. He also voiced his disapproval of a big government through another quote. “Government’s view on the economy could be summed up in a few short phrases: If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it.” These were all ideals Reagan was staunchly opposed to, and so his first aim as president was to constrain and limit the government, and especially its spending.

Income taxes were a major issue according to Reagan and one of his prime aims were to adjust them. Reagan did not believe in heavy taxation and followed the theory of the Laffer curve. He especially believed in lower taxation for the upper realms of society. Reagan thought that reducing taxes for those at the top would make it easier for them to produce cheap goods, which would stimulate competition and ultimately, help the consumer. In his system, Reagan would raise taxes for the middle class and reduce them for the top 5 and 1 percent of American society. He believed this lure of low taxes would motivate suppliers to make more money.

Unbridled capitalism was one of Reagan's major goals. He believed that the free-market economy, and lazzies-faire policies helped nurture economic freedom. He believed that the economies problems work themselves out.

Reagan also tried to reduce inflation by reducing the money supply.
The only area where Reagan believed in an increase was in Military spending, which he thought could serve to protect the American public.

During his presidency, Reagan was largely influential due to the shift in American politics. In one of Reagan’s speeches in 1977, Reagan even revels in this shift. He says of conservatives, “we are part of the great majority of Americans.” Thus, many of his proposals were passed by congress. This aided Reagan and made him one of the most influential presidents in America’s history. During his administration, Reagan successfully busted unions and even busted a 1981 union by firing the striking workers. Reagan also passed various bills that were in line with “Reaganomics” and its overlying theories. One of which was the tax recovery act of 1981, which reduced the top income tax bracket from 70 to 50 percent. Reagan also passed both the Tax reform act of 1986 which reduced the top income bracked to 28 percent and increased the bottom tax bracket from 11 to 15 percent. These among others were the actions Reagan took in accordance with “Reaganomics”

Effects
The effects of “Reaganomics” have been subject to rigorous debate. Its effects are revered by those from the right wing and opposed vehemently by left-wingers. “Reaganomics”, according to the President himself, was supposed to increase investment and economic growth, balance the budget, and improve the living standards of all Americans. However, in retrospect, it is evident that these goals were not all met.

The immediate effects of Reaganomics are quite controversial. Reagan entered the election with the promise that his economic system would aid the hard-working common man. He made constant references to his humble roots from Dixon, California. Thus the American public sincerely believed he would fight for them. However, they were in for a rude surprise.

After WW2, America had been experiencing a period of sustained economic growth and perhaps more importantly, an economy free of recessions. However, as soon as Reagan enforced his policies, the US slipped into the recession of 1982, and later on the stock market crash of 1987.  Unemployment in the US was at 5.6% in 1979 but reached a high of 10% in 1985. Farmers also soon realized their demise as 400,000 American farm families lost their land between 1985 and 1989. This signaled the shift in American Farming to the large agribusinesses they are today. As American farmers were losing their land, agricultural giants such as Cargill increased their profits by 66 percent in 1986. These examples only serve to display the bigger American economic picture. Throughout the Reagan administration, the influence of Unions was waning, and American workers increasingly found their economic well being in jeopardy. Corporate taxes were also cut, from 48% to 34%. Already thriving corporations were aided even further, and this led to the rise in profits for America’s largest business institutions. Ronald Reagan, through his advocation for entrepreneurship, led to the rise of greed in America.

Even more startling was the Tax equity and fiscal responsibility act of 1982, which in essence repealed many aspects of the economic tax recovery act of 1981. Reagan realized that the first bill he passed was highly unrealistic, and thus INCREASED taxes in order to reduce the widening deficits. This bill, recognized that the tax cuts in 1981 led to a decreased revenue stream. Reagan, in order to stimulate the American economy, did exactly what “Reaganomics” advocated against.

Interestingly enough, Reagan also strayed from his financial doctrine in the area of Federal spending. From 1981 to 1989, federal spending only fell by .8% of gdp.

As is already evident, the common man did not benefit whatsoever from these wholesale changes. While the top income bracket was slashed from 70% to 28% for the wealthy, the middle class actually experienced an increase in taxes. When the consumers do not have the money to buy products, this spells a bad omen for any economy. As a result of this, poverty rose every year from 1981 to 1992. Instead of realizing that this was a problem, Reagan opted to increasing the lowest tax bracket in 1986, from 11 to 15%. This increase was unnecessary, as no real revenue can be procured from those who are already low on money.

Also detrimental were the widening deficits and the rise in debt during the Reagan administration. During his administration, American debt rose from 900 billion to 3 trillion. Debt was 32% of our gdp under Carter, but rose to 66% at the end of the Reagan administration. In two years the Federal Deficit rose from 80 billion to 200 billion. These problems were a direct result of the increase in Military spending instituted by Reagan himself, and his refusal to raise taxes to supplement those needs. Reagan forgot a powerful rule, that you must make more than you spend.

The long-term effects of Reagan’s legacy are in fact more profound than their short term ones. While Reagan is largely credited with engineering the largest peacetime economic expansion in United States history,  the real economic picture is not so rosy. While it is true, the United States GDP has been steadily rising since the 1980s. However, the share of the middle class has actually lessened throughout this period while the top 20, 5 and 1 percent having seen the largest growth. Inflation adjusted median family income has also remained stagnant since 1980 as a result of Reagan’s policies. Also, from 1970 to 2000, the share of income received by the middle 60% of American families declined from 54 to 47%. The top 20 and especially 5% were the main benefactors of this shift. 80% of income gains since 1980 went to the top 1%. Corporations also experienced an increasing portion of the US GDP over this same period of time. By 2008, the top 1% of Americans owned 23% of the wealth. The last time the wealth was so concentrated was in 1929, and most Americans remember what happened then. Reagan’s legacy emphasized that “greed is good” and coupled with the increasing deregulation of American businesses, it becomes evident why the rich are prepared to do anything for more money. Micheal Moore once stated in Capitalism: A love story that when Reagan was elected “American corporations had gotten exactly what they wanted.” Gone were the days of an equal distribution of wealth. And with this, the plight of the American middle class ensued. These damaging measures instituted by Reagan and followed by his predecessors ultimately led to the biggest bubble of all bubbles. That is, the American consumers simply did not have enough money to buy what was being produced. If America learns one thing from the 2 biggest economic meltdowns in its history, it is that the middle class must be sustained for a healthy economy.

Thesis
Reagan’s pragmatic approach to American Economics inadvertently led to the downfall of the American middle class, the corporitization of America, and eventually the financial crash of 2008.