As the United States, Europe and worlds other major economic powers implement programs and policies to end a financial crisis that threatens to severely damage economies worldwide, a number of myths and misnomers -- some promoted by the current U.S. administration -- are being dispelled, and we'll review each in the months ahead. BloggingStocks has asked economist David H. Wang, a colleague and friend of yours truly, to help dispel a few of these myths.
Wang approaches the economic scene from a unique perspective. Wang was born and raised in Communist China for 22 years, before moving permanently to the United States in 1989 for graduate school, completing his Ph.D. in economics in 1995.
Myth: "The best thing government can do for business is get out of the way."
Pretty thin argument here, Wang said. As the events of the last year demonstrate, government getting out of the way -- creating a no- / low- regulation banking sector and market -- can lead to very negative and in some cases disastrous results.
"Businesses in financial services and mortgage financing were permitted to have free rein over mortgages and mortgage finance," Wang said. "The market was the judge."
Wang continued, "And what did the free market achieve? The market created securitized mortgages in instruments so complex, even banks are having trouble valuing them. The lack of transparency of these instruments is part of the reason banks became afraid to lend to one another and the reason credit markets froze up. Warren Buffett has called these derivatives, and others, 'financial weapons of mass destruction' and he is right. To protect the public, and the financial system, we must regulate and monitor money flows, markets, and investment, particularly when taxpayers are liable for any bankruptcies or systemic failures."
Myth: "Lower taxes for upper income citizens guarantees that they'll invest the money, creating jobs, and increasing economic growth."
This notion was discredited decades ago, Wang said. "While it is true that if you lower taxes, incentives for investment, as well as for work, increase, it is not true that lower taxes will lead to investments that necessarily create jobs at home in the United States, or that even increase economic growth."
Wang explained: "A nation could cut taxes on upper-income groups and they could invest the money abroad, or in other vehicles / instruments that add few jobs, and in fact this has been the case with the Bush Administration's tax cut passed in 2001," Wang said. "Further, there isn't even a guarantee that cutting taxes will increase government tax revenue through increased GDP growth."
"One thing that cutting taxes on upper-income groups does do - - it almost always makes those in society who are rich, even richer," Wang said.
Economic Analysis: Economist Wang offers two substantive critiques of two myths forwarded by market absolutists. Far from being a problem, had the United States and European governments not intervened to stabilize the financial system, the global financial system would have deteriorated further, perhaps to the point of collapse. Moreover, if history is any indicator of U.S. political movements, the subsequent response would not have been pleasant for conservatives and other limited-government proponents.
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Reader Comments (Page 1 of 1)
10-15-2008 @ 8:32AM
d a hick said...
you have some young idiot trained in a communist country coming to the usa and giving advice on our economy? maybe you should go back to china with him.
we need business people, small busniess people, who have lived and worked in the us of a, remember thaat?, the us of a?
not some overblown egotistical professor who couldnt hold a job in the real world.
thats our problem, too much acedemics and not enough reality.
10-15-2008 @ 11:40AM
DP said...
The rich have figured out that they can make themselves richer through poltics. It's amazing that the minority rich pulled this off but the power of using organized religion to control people is not to be underestimated.