I am going crazy listening to conservative pundits pontificate about the troubled market and how the blame should “essentially” fall on all of those consumers who buy homes they cannot afford. They further contend that banks made poor decisions lending money to consumers at an unregulated and unadvised rate. But you never hear FOX news and others talking about the inherent problem of pure capitalism. Runaway markets and high tuition on college campuses are killing us. If we value the process of a free American society, then I contend that all “people” should have the right to own a home. But what do you do if you live in an area in which the 1% of society dictates property value? I listen to people complain about homeowners buying homes they cannot afford, often ignoring the market economy. If I live in a pricey city such as Tampa or San Francisco, are you telling me I do not have a right to own a home due to the fact that a bank will have to give me a 62 – 70 year mortgage rate? Oh, when the government cut taxes for 8 years while deficit spending increases, the economy only has one direction to shift — downward. Ask H.W. Bush about this. After a decade of spending under the Reagan regime, he went into office assuring the neocons that he would not bring about any new taxes. However, once in office he realized that the government cannot operate in the red due to tax cuts.
When Bill Clinton was elected, he had to change the national mentality of allowing economic elites run the country. Bill accepted welfare reform as well as a new commitment to reducing the size of government. Although I did not like his 1996 welfare reform, he promised not to leave those who needed help stranded. Moreover, when he left office, the country saw the deficit reduced and enjoyed a surplus that allowed the country to with stand the 9/11 economic hit. Funny, but if “W” was wise, he would have used that surplus to address social security reform; instead, he launched the country into a pricey war that has increased the deficit.
We are forgetting that our current condition is to an extent driven by the flaws of capitalism. I do think we should undertake radical economic reforms. Obama’s stimulus does not go far enough. The state should regulate and even subsidise tuition and the purchase of homes so that a poor person can purchase without going into debt; I have found a number of my own students amazed that people have to borrow a substantial amount of money to attend school. Thus setting them back decades upon graduation due to a heavy student repayment plan. Oh, these are the good students that got some money to attend. I called the current economic crises years ago; it is not because I am some economic rocket scientist. I just used objective common sense. When I taught AP Macroeconomics, I started this way:
I like the simple though somewhat outdated Keynes ratchet-effect graph, which states:”changes of the relationship from nominal wage to price level (real wages) in the Keynesian variant of the total models for the open and closed national economy.”
In layman’s terms, let us look at the above graphs this way: In graph one, AD=C+I (aggregate demand [equals] consumption [plus] investment. According to this visual, we are looking at a closed private economy with no government. Consumption is the function of disposable income. If people are not spending their income, the economy slows ; however, if we look at graph 2, we see as is true for graph 1 that Y represents equilibrium of income. Thus this happens when AD is equal to AS. The key to all of this is spending and avoiding a trade imbalance.
The government can hence “stimulate” or use “injections” to move the economy forward if spending is slow. I like the ratchet effect to denote this concept:
Ideally, we want AD to operate at point (a), but we do not want it to shift to the left — which notes a possible recession. We do not want the AD line to shift to the right toward the vertical line showcasing the classical range. This means the economy is operating too fast thus there are no more resources for output.