<< Back to Blog

How to Fix the Economy 101 - 07/23/2009

In my day job, I'm a professional troubleshooter.  When something (usually IT-related) isn't working right, I have to figure out how to fix it.  Over more than the last decade, I've gotten quite good at this, and have decided to apply those same skills to the economy.  Essentially, the process is to identify the problem, identify the culprit, then identify the solution.

First, we identify the problem(s):

• The national unemployment rate at the end of June 2009 was 9.5%, which is the highest since August of 1982.
• Federal government debt is at an all-time high of $11.5 trillion, the deficit has reached a record-shattering $1.85 trillion, and approximately 85% of state governments are upside down in their annual budgets.
• There are no signs of an upswing in the near future (a pseudo-economist appearing on television saying "I think we're at the end of this thing" is not evidence), and multiple attempts at government "stimulus" have fallen far short of their stated promises.

Second, we identify the culprit(s) (hint, it's not capitalism; since we've never had capitalism, it couldn't possibly be):

• In the late 1990s, the federal government decided that everyone should own a home, whether they could afford one or not, and would back banks that made loans to poorly-qualified buyers.
• A rush of new buyers caused home prices to artificially soar.
• As should have been expected, those would who could not afford to pay their loans defaulted.
• Centrally-planned monetary policy created malinvestment.

And finally, we identify the solution(s) (hint, it is capitalism):

• Recognize that government has great power to damage the economy, but very little to help it, and should therefore keep its hands off.
• As minimum wage and unemployment are directly related, an immediate reduction or elimination of the federal minimum wage will cause a surge in new employment.  The option of a low-paying job is better than no job, and new jobs will increase production that will spur yet more jobs.
• As income tax rates and job creation are directly related, an immediate reduction of income taxes will allow employers to reinvest and create new jobs.
• If the current administration is set on spending $2 trillion to stimulate the economy, the best method to employ would be a two-year moratorium on personal income taxes, letting those that produced the wealth keep what they produced and encouraging them to reinvest it to produce even more.

I recognize that everyone who's studied this issue to any degree has their own theory that they like to stick to.  And many people point to "greedy businesses and banks" as the core problem.  But banks and other businesses have always been profit-driven, they've always been "greedy".  What changed that caused their "greediness" to manifest itself in this way only within the past decade?  Why didn't this happen in the 90s, the 80s, or even the 60s?  It's essential to look at the core cause, the effects that occurred as a result of the cause.

Government monetary policy for the past decade has been to flood the market with easy credit, and that is the core cause.  One can argue that they did this intentionally because they want to take advantage of a crisis, as Rahm Emmanuel indicates that he likes to do; or one can argue that it was simply unknowable that this would have happened as a result (even though those who understand the economy predicted it).  But either argument is an argument for reducing the amount of control the government has over the functioning of the economy.