American recession a part of capitalism

By Frank Orlich

Ronald Reagan’s words echo in the hearts of Americans who look to his legacy for guidance through the recession. (AP Photo)

Ronald Reagan once quipped, “The nine most terrifying words in the English language are: ‘I’m from the government and I’m here to help.’” At a time of bailouts, regulations, and agencies overseeing every action we take, every product we buy, and attempting to control every action of our lives, Mr. Reagan’s words may never be truer.

Worse than the actions our government has taken in response to the economic meltdown is the response by citizens. Rather than allow the economy to correct itself, as it has done time and time again, Americans hit the panic button. Not all that surprising of a response; fear has lead people to do crazier things. Yet, when most realize that they acted out of fear and that the decisions they have made were wrong, they attempt to correct the problem, fix their mistakes, and go back to the way things were.

Still, most Americans are up in arms about the income inequality, the ever-increasing gap between rich and poor. Few realize that a large Gini ratio (the statistical measurement of income inequality) actually enables economic growth by promoting innovation and competition. Think about it — a more equal distribution of income (everybody makes a relatively similar amount) halts competition. Why should anybody fight for a better job or a higher salary if the government is simply going to intervene and make the differences negligible? Historically, countries with higher income inequality ratios have higher rates of economic growth.

Even fewer realize that the widening gap and the disappearance of the middle class is more statistical than real and is the result of basic market forces. The most transformative modernization, the Internet, generates a fairly high output, with a low level of input. General Motors at one point employed over 600,000 people. Facebook has over 500 million customers and is supported by a staff of only 2000.

I’m not arguing that the loss of a middle class is not a problem, or that income inequality should be ignored, but rather that they are the result of economic forces. Improvements in productivity have undermined the need for low – to middle-skill labor. The economy acts in odd ways, but it always seems to correct itself eventually. My argument is simply this: place your trust in the market and it will be okay.

I can already hear the critics. Yes, I know how much the top .1 percent of Americans make. Yes, I agree that the top .1 percent are not working 80 times harder, and thus do not deserve 80 times more wealth than everyone else. And yes, I know the economy got us into this mess and it’s tough to trust it now.

We as Americans thought we were richer than we were. We operated under this delusion that America was the global hegemon, and no one could ever threaten our power, security, and most of all, our economy. We grew accustomed to habitual increases in propensity, as if they were guaranteed to us by some divine right. It’s why many bought lavish houses on a low income. It’s why many played the stock market game. We thought we were untouchable, that our purchases could never hurt us, that we could do no wrong.Americans need to realize that recession is a part of capitalism, and though it hurts now, the pain will eventually go away. This is the primary point of economist Tyler Cowen’s new book, “The Great Stagnation: How America Ate All the Low-Hanging Fruit of Modern History, Got Sick, and Will (Eventually) Feel Better.” In it, Cowen writes, “Given that bubbles have popped in just about every asset market, and in many different countries, we can only understand the financial crisis by looking at some pretty fundamental and pretty general factors. It’s not about a single set of bad decisions or a single group of evil or misguided people. It’s not Republicans or Democrats or farmers or bankers or old people or young people or stupid people or Christians or Muslims.”

The bottom line here is that everyone played their part in getting into this problem.  Instead of trying to figure who to blame or who to elect, rather than attacking what has been a staple of our country since its founding, I for one would contend that it’s much more important to find a way out.