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Monday, January 9, 2017
A Short and Simple Economic Primer for Liberals
Howard J. Warner
Former Secretary of the Treasury Larry Summers appeared on Maria Bartiromo's Fox News show Sunday and proceeded to attack the Trump economic agenda. However, his present views seem to conflict with the policies he followed while in the Clinton administration.
In 1999, he supported the Gramm-Leahy-Bliley Act, which removed significant restrictions in commercial banking imposed by the 1933 Glass-Steagall Act. Now he claims that Trump's interest in reversing the Dodd-Frank banking bill will cause another great recession. What has changed in the years?
In February 2009, Summers quoted John Maynard Keynes, saying "When circumstances change, I change my opinion." As Summers participated in the Obama administration (which blamed deregulation for the 2007-08 bank failures) he took different views concerning the subject (as he sought the position as Federal Reserve Chair). He opposed derivative regulation, in the 1990's, which President Clinton noted was bad advice.
Summers had opposed having the USA lead on global warming costs and taxes while in the Clinton administration. Perhaps the political environment has changed also. Maybe Summers (a Harvard University professor) has specialized in macro-economics for so long he has forgotten micro-economics. Perhaps he has varied his views depending upon his business relationships (on Wall Street), government, or academic?
In micro-economics, the basic concept of markets depends upon the concept of supply and demand. In 1980, Ronald Reagan's advisor provided his twist to this concept, known as the "Laffer curve," which became known as supply side economics. In this idea, substantial reduction of business expenses would allow greater than expected benefits in reduced production costs and greater expansion of the national economy. This was derided by liberals as "trickle-down economics." The hallmark of Republican Party policy is a reduction in federal income taxes, first tried successfully by Democratic President Kennedy.
This policy has been amazingly successful, but is opposed by modern Democrats since it restricts government growth. The concept pushed by President Obama is now called "bubble-up economics," with greater government spending to transfer wealth from rich to poor and stimulate consumer spending.
So, the difference in the two political parties appears to be simple: Republicans, who prefer capitalism, see the private producer sector as innovative and cost reducing; this allows the consumers many more and efficient choices. Meanwhile the Democrats prefer governmental influence and believe the government regulation of the businesses and the consumer are the determinant entities in the national economy. Unfortunately, it is the equilibrium between the supply (producers) and demand (consumers) that determines a healthy market economy.
None of this prevents disruptions, which occur when conditions get out of whack. Liberals use this as an opportunity to exercise more control. Liberals argue that guarantees to the population can ensure better lifestyles for all. However, this is an inefficient use of resources and prevents entrepreneurial endeavors, which leads to new industries and wealth accumulation.
Republicans have failed to defend the marketplace in the past. Trump has no anxiety about success and wealth, so he will proudly proclaim the benefits of individual choices in the marketplace; healthcare comes to mind as a sector in need of reduced governmental intrusion. Third party payments have altered the marketplace over the years. However, regulation by governmental agencies has distorted the marketplace and increased costs further. This has prevented innovation by insurance companies (suppliers) and medical providers (suppliers). Patients (consumers) have few choices in policies other than cost up-front (premiums) or later (deductibles).
Liberals such as Summers might benefit from understanding how the grocery store business has given Americans immense choices with manageable costs. Costs are posted and the items are clearly marked. This has allowed a purer marketplace and fed Americans successfully.
Summers further argued against Trump's effort to maintain American jobs, which has raised hope for wider employment in the middle class. He has challenged the rise in the stock market (the "Trump bounce") since it will increase the value of the dollar against the peso. He then argues that the Mexican economy will grow more as a result. I guess that he would argue for us to eliminate all of our jobs so it will make the peso higher and the dollar lower. So, this sounds like the Obama policy on economics.
It is time for better economics education in high schools and colleges. Liberals need to run a business before creating such lousy policies. Certainly, this book smarts approach lacks any practical sense.