New Deal Part I didn't work as well as some of FDR's hagiographers like to claim ... unemployment never dipped below 14% until the dawn of WWII (when it suddenly went down to 1.2%) ... many economists believe that FDR's meddling in the economy actually prolonged the Depression. But it made people feel like somebody was doing something, and it also created a cycle of dependence on the government whenever things go wrong.
The last time we were in a big recession -- stagflation, double-digit interest rates, the "misery index" -- the answer was a complete restructuring of the economy. A huge tax restructuring freed up capital for investment, deregulation made things less costly for businesses, free trade lowered prices for consumer goods.
The current recession is caused in large part by:
*-Inflation (which is being fueled mostly by ...)
*-Rising energy costs (which, given we can't drill for our own oil to appease the environmental lobby and won't take a piece of the Iraqi oilfields in an effort to look like we're not being imperialistic, is out of our hands). Natural gas prices have also skyrocketed.
*-Rising prices for raw materials (which is also out of our hands ... the economic booms in China and India are fueling those).
*-The weakening dollar (which is fueled by a trade deficit that is largely backed by oil and our demand for cheap consumer goods that can't be produced as affordably in the United States, so they get outsourced).
*-A weak housing market (that can, and will, rebound ... housing was grossly overpriced in the early part of the decade, and the free market always corrects itself).
*-High health care costs, because of the fact that health care is a private enterprise run as inefficiently as a government program.
*-Huge consumer debts (also, along with speculation in the stock market, the primary cause of the 1929 depression).
*-The expectations of the American consumer. Because we have to have stuff -- more house than we can afford, two nice new (probably leased) cars, plasma TVs, computers, a cell phone for everyone in the house, cable/satellite TV -- we spend and spend and spend.
When this 25-year run of generally-increasing prosperity started in 1982, the average household owned a decent 3 or 4-bedroom house that would cost, in 2008 dollars, about $100,000 ... and would be paid for with a fixed-rate mortgage. The monthly obligations would be for gas (in 2008 dollars, about $1.95 a gallon), electric/heat (maybe $75 a month in today's $$), and telephone (about $50 a month today) ... cable TV would be a luxury that most wouldn't have access to. But add $35 a month in today's $$ for that. ... most homes had one or two TVs, the computer was a Commodore 64 and entertainment was staying home on Friday and watching the Dukes of Hazzard and Dallas.
Today, we have cable Internet & cable TV & cell phones & either your land-line or VOIP phone ... compare $150-250 a month instead of $50-85. Gas costs $3.00 a gallon instead of $1.75 ... and we drive bigger cars, to boot. Electric/gas can cost an average of $250 a month in a winter climate. That, and we have working class families moving into McMansions in the burbs that an upper-middle-class family couldn't have dreamed about before ... and then realizing they can't afford it when the ARM adjustment kicks in and have to cut back.
Guess what? How much are we saving?
And, with the rest of it, the debts are going to pile up and you have to pay them off. At some point, the bills are going to come due and we stop spending money.
It's what we call a market correction. When it corrects, things will be OK.
What the government does need to do ...
*-Get out of the Iraq & Afghanistan wars, and stop fighting wars unless the U.S. is under immediate attack (this is from an economic perspective ... whatever your opinion on the war is, we're over there now and need to at least get things stabilized before we leave).
*-Severely cut back on non-necessary government spending -- pork, earmarks, et al.
*-Eliminate the deficit, and then use the surplus to both pay down the national debt and reduce taxes.
*-Increase drilling for domestic oil to lesson OPEC's stranglehold on the economy. The market will bring forth alternative fuels and hybrid cars, but they will come slowly.
*-Reward saving and make going into debt more costly. Raise interest rates. It will slow the economy down in the short term, but the long-term benefit will be astounding. It will also help reduce inflation and thereby strengthen the dollar. It will also increase investing, which will help strengthen American companies and allow them to have more value and stimulate the economy.
*-Use our comparative advantages to increase exports of key natural resources (and lessen imports of oil) to try to fix the balance-of-trade problems.
*-Make the "diversification" of loans illegal. Subprime loans became a problem because the risk was held by so many different people, that there was very little risk. The bank making the loan cannot "sell" it off in parts -- it must assume the risk, and therefore, it won't be as likely to use trick financing to sell things to people who can't afford them.
*-Overhaul the health care industry by making it more feasible for private policyholders to purchase insurance coverage themselves without a group benefit, or to have a free-market system that combines tax-free medical savings accounts with high-deductible "catastrophic" health policies, which would bring health care costs down by taking out the middleman and allowing you to pay your doctor directly for routine care.
