THE BLOG
01/28/2013 04:52 pm ET Updated Mar 30, 2013

Fact Checking the Economic Debate

There is one topic that will always be relevant: the economy. Whatever news sources you use, you can be certain that the left and right will be going head to head about who has the plan that will bring growth and prosperity to end our recession. Liberals claim the answer is more government spending on things like infrastructure and the social safety net, citing the New Deal and the period of economic growth following it. Conservatives on the other hand insist that the answer is less government: deregulation, privatization, and austerity. They argue that the debt is the biggest problem faced by America today. But who is on the right side of history? The media has done a good job treating both sides as though they have equally valid arguments, however, as with the gun debate, regardless of one's opinion, the facts do line up on one side.

Conservative economic theory can be traced back to the Chicago School of Economics. The Great Depression showed Americans the need for government intervention in the economy because among the many causes of the crash, the unregulated markets compounded the fallout. In the 1940's laissez-faire wasn't taken seriously by academics. The Republican Party had taken a political thrashing because the crash hit when Hoover was president and he failed to alleviate the problem. This caused a realignment in the Democrats' favor. It wasn't until economist, Milton Friedman began teaching at the University of Chicago that the idea of laissez-faire began gaining traction. Friedman convinced President Richard M. Nixon of the benefits of his ideas as foreign policy but only during the presidency of Ronald Reagan would they begin seeing domestic application and popularity in America. Since then the Republican Party has adopted Friedman's ideas into their platform.

But how effective are these policies at promoting economic growth? History may provide insight. Perhaps the purest test of Friedman's free markets occurred in Chile after Augusto Pinochet overthrew president Allende. Prior to the coup Chile was industrializing and the middle class was rapidly expanding. The new US-backed dictator implemented sweeping laissez-faire policies. He cut regulations especially on the financial sector and trade, and sold off public holdings. Advising him was none other than Friedman and his disciples, the Chicago Boys. The result was immediate. There was de-industrialization, the economy crashed and remained depressed for a decade. Unemployment, debt, and corruption exploded. Friedman insisted that the markets would right themselves soon, however only after Pinochet changed course did the recovery occur. Similar policies were enacted in Argentina and Brazil with the similar outcomes: progression turned to regression.

But these events did not occur in the US so the majority of Americans remained ignorant of the debacle, and the debate continued. Conservatives have been using Freidman's theories to chip away at the mixed economy established by the New Deal ever since. As a result the wealth gap has exploded, safety standards declined, and there have been two major financial panics. The first of which to arise was the Savings & Loans Crisis, caused by deregulation, which hit its peak in the 1980's under President Reagan.

In response to the mass insolvency from the interest rate crisis which occurred in the later years of the presidency of Jimmy Carter, President Ronald Reagan de-supervised and deregulated the S&L industry. There were two key pieces of legislation: the Institutions Deregulation and Monetary Control Act of 1980 and the Garn St-Germain Depository Institutions Act of 1982, modeled on the Texas model for savings & loans deregulation because Texas was reporting the highest profits nationwide. The problem was that Texas was a hotbed for accounting fraud due to the deregulation. Though much of the deregulation was found at the state level, Reagan drew a hard line against supervision and enforcement. Under the new law S&L's were allowed to switch between federal charters and state charters while maintaining federal deposit insurance. Naturally, they flocked toward deregulation which created a race to deregulate between the states and federal government because the state legislatures wanted to preserve their regulatory roles and fee collections. The states began marketing to real estate developers who bought up S&L's which created a serious conflict of interest. Greedy individuals, reporting high ADC income and eager to lend to as many people as possible, particularly in the field of construction, gave out loans to unqualified buyers, hiding their losses by booking new ADC loans and giving themselves huge bonuses in dividends. The result was too many lenders chasing too few loans which caused the commercial banks to begin underwriting their own standards in order to compete and grow. The system went belly-up when people began defaulting on loans and the government had to bail out the industry.

Twenty years after the S&L Crisis, the US faced the 2008 Subprime Mortgage Crisis that is responsible for the recession we are currently in. This was also caused by deregulation. What happened is this: After the Great Depression regulations were imposed that created a system of decentralized banking where banks could not operate across state lines. What this ensured was that if one failed the government could reimburse the loss. Then in the 90's and early 00's Congress passed a series of sweeping "reforms" that tended towards centralization of power in the hands of a small number of banks that were "too-big-to-fail." These laws included the Reigle-Neal Interstate Banking and Branching Efficiency Act of 1994, the Financial Services Modernization Act of 1999 which eliminated the New Deal's Glass-Steagall Act, and the Commodity Futures Modernization Act of 2000 that deregulated derivatives trading. President George W. Bush did his his part to weaken regulations as well by convoluting laws to make enforcement near impossible. Because of their size the banks were able to exert unprecedented influence over the rating agencies on Wall Street and the institutions supposed to oversee them. The result was that when bankers began delving into high risk securities trading nobody was there to stop it. In fact, everyone was on board. The subprime derivatives market exploded to a point where lenders weren't even keeping records due to the rapidity of trading. By the time the crash occurred due to people defaulting on loans they should never have been given, nobody knew the value of the assets they were holding onto. The resulting lending freeze caused many small and medium sized businesses to fail. When the dust settled many had lost their 401K retirement funds, their homes and their jobs. Social Security however, remained strong illustrating that private does not necessarily mean better.

To this day conservatives are still fighting the same economic battles with liberals. With the reelection of President Obama and the results of the 2012 election, they can do little to affect regulations; Republicans lost the majority of votes in all three national races and only control the House of Representatives due to redistricting. However, they are trying to implement Friedman's ideology by cutting the social safety net, insisting that the government, and President Obama in particular, has a spending problem. The "fiscal cliff" debacle in 2011 in which the US downgraded its credit rating was part of this strategy. How valid are these arguments for cutting spending now?

Recently, S&P put out a report saying that while there is a long term spending problem, there is a deficit problem. Many economists believe that truest way to measure the debt is to compare the ratio of interest payments to GDP. That number is at one of the lowest levels in the past 50 years. With interest rates low, investor confidence holding, inflation at 1.8 percent, and a recessed economy, the fact is the US is in an ideal place to be borrowing and spending money. The legacy of the New Deal dictates that in times of economic crisis, spending is the solution, not the problem. The New Deal failed to end the Depression on its own because FDR did not spend enough. Modern economists agree that the kind of cuts the Republicans want will hurt the economy. Indeed, the damage dealt by austerity measures is well documented as are the benefits of social programs. Contrary to conservative claims, President Obama's rate of spending is lower than the previous four president's, and he should probably spend more in some areas, in particular, infrastructure and the safety net, and less in others, particularly the military.

Nevertheless, in spite of overwhelming evidence, there is still an echo chamber on the right parroting these failed policies. But why have these ideas spread? Part of the reason is due to the Reagan realignment, but there is something more fundamental at work. Americans are a proud people. We as a culture value hard work and a DIY attitude. Alexis de Toqueville characterized this quality as our pioneer spirit, or frontier mentality. The most disgusting trick ever pulled in America was the GOP manipulating this sentiment to convince hard working Americans that government assistance promotes laziness rather than keeps society in balance. The fact that the economy is recessed due to the policies the party still promotes makes the lie especially sickening given that more and more people need help these days.

As with the gun debate, however, those who believe in falsity are losing. The 2008 election of President Obama marked a realignment that hit its stride this past November. As mentioned above, the GOP lost the majority of votes in all three national races. The country is slowly rejecting their ideas. The internet has played a key role in the process making information readily available to those who want it.

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