"Opinion, whether well or ill founded, is the governing principle of human affairs." -- Alexander Hamilton 1778
Thirty years ago, the nation was experiencing its worst peace time inflation. The media blamed Democratic President Jimmy Carter for the situation and the public largely echoed the media. The bad economy helped Ronald Reagan win 50.7 percent of the popular vote and defeat Carter.
In the three decades since then I have often asked, "What did President Carter do to cause the inflation for which he was blamed?" The recurrent answer is: Carter had big deficits. But that answer shows an ignorance of the facts and theory. During the Carter years the federal deficits averaged $54.5 billion annually; during Reagan's eight years they averaged $210.6 billion. If deficits were the primary force driving inflation, Reagan's inflation rate would have been well over three times Carter's and yet inflation was much lower under Reagan. In fact, market forces, especially oil price increases from the Middle East, generated inflation.
Today there is further proof that deficits do not necessarily cause inflation. We have record deficits and yet inflation is about 2 percent. Our federal government can now sell inflation protected long- term bonds at an interest rate of only 1.04 percent. The federal funds rate -- the rate at which banks loan to each other -- now fluctuates between zero and negative .25 percent.
In retrospect, it is clear that a demonstrably false theory caused Carter to be blamed for inflation he did not cause. Why are politicians and government blamed for the failure of markets and capitalism? Capitalism is sacrosanct in respectable circles and is off limits from criticism. Therefore, government and politicians get blamed for problems that are inherent in the capitalist system.
This tendency is reinforced by the preposterous myth that markets automatically allocate resources in a way that serves the public and humanity, and so government intervention and regulation is not needed. The fact is that increasingly a smaller percent of resources is spent on production -- which would serve human needs -- and a larger percent is devoted to speculation because the market rewards for speculation have grown astronomically. For an example, the tiny company Cornwall Capital put down $300,000 in March 2007, betting that Bear Stearns would fall and it made $105 million in March 2008 when Bear Stearns' demise occurred. Last year the compensation of the top 25 hedge fund managers was over $1 billion apiece. (No, that is not a misprint.) Les Leopold points out that to assume that society compensates a person according to his or her contribution to it is to assume that a hedge fund manager contributes 26,000 times more than a school teacher. It assumes that 25 hedge fund managers contribute what 658,000 teachers do.
Because of unregulated markets, "A small foundation of real assets supports an immense tower of speculation." (Roger Terry) In 2008 the financial derivative market (a market of bets and speculation) was eighteen times as large as the total of all the goods and services produced that year. Specifically, in 2008 the value of derivatives exceeded $1.1 quadrillion while the total world GDP was just over $61 trillion.
Of course capitalism and markets have many positive and spectacular achievements. But from this nation's inception, periodically, it's had severe economic problems. To blame politicians and government for the defects of markets and capitalism is to block a realistic understanding of their operation and encourage shallow thinking.
Our current problems were created because wealthy and powerful individuals were directed by market forces to respond to the housing bubble. Wall Street drove the nation into a ditch and now it blames politicians for the harm it inflicted.
Because so much of the U.S. economy is the private property of individuals and businesses and is under their direct control, how is government supposed to get them to invest in more plant capacity if they already have excess capacity? For example, if you can only sell 70 percent of your existing office space, why would you create more? Clearly, economic forces are larger and more powerful than government.
To a large extent, the world economy is the private property of a very fortunate, powerful and tiny minority. If this profit-maximizing minority chooses to shortsightedly invest their private property in bets which ultimately kill jobs, impoverish and wreak havoc on the lives of millions or even tens of millions, why should politicians be blamed?
Rick Jones has taught economics. He lives in West Haven.
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