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"Catch-22" in Government Poliicies

By       Message Seymour Patterson     Permalink
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The notion of two years of free education broached by the president in the State of the Union address was welcomed by some and pilloried by others. With the current control of the Congress in Republican hands, this proposal is dead on arrival. But the idea of free education is not a novel one--there is GI Bill and, of course, grade school and high school are for the most part free. Before 1980, students could attend public colleges and universities for a pittance. Now, because the successful increase in anti-government sentiments, counterintuitive policies that harm people are seeing the light of day. For example, Governor Scott Walker's budget would cut $300 million from the Wisconsin university system, but he proposes to spend $500 million on a sports stadium. Governor Bobby Jindal hints at doing the same disservice to education in Louisiana. This kind of thinking has foisted a great deal of financial hardship on students with a collective debt overhang in the neighborhood of $1.1 trillion.

Some policymakers allege that the search for profit would somehow lead to efficiencies that government interference defeats. This is the rationale behind the thrust to privatize hitherto government services that serve the common good. This thinking ignores the economic debacle caused by business failures, which led to bail out the auto industry, the financial sector, and the attempts by the government to deal with the collapse of the real estate market in late 2007. Other mischiefs businesses engage in, which the government enables through its deregulation, can be documented. Companies profit when they escape the social cost of pollution; from rigging the Libor (London Interbank Offer Rate) that advantaged traders, that is " ... traders often asked the Barclays employees who submitted the rates to provide figures that would benefit the traders, instead of submitting the rates the bank would actually pay to borrow money," the New York Times noted." (See: Council on Foreign Relations for a discussion of why and how this illicit activity was fined $6 billion.) Banks also benefit from charging card users usurious interest rates as high as 22.99 percent. Despite their much-vaulted claim to efficiency, businesses declare bankruptcy all the time--think: K-Mart, Borders, Circuit City, and Block Buster. There is also long list of banks that were bailed out at a cost to the government of $200 billion (Money.cnn.com).

Perhaps, failed businesses should not have accepted government bailout money, inasmuch as the government's action could be seen as misguided and inefficient. Or at best, government policymakers needed only to cut top marginal tax rates, reduce regulation, and step aside and allow the free market to work its efficiency magic. In other words, the government should do nothing because order will come from disorder--spontaneous order. This begs the question: why has not this happened in Somalia or for that matter in Syria and Iraq? Maybe, this happens only in economic matters and not political dysfunction. Or perhaps, we just need to give it--the free market--more time. I wonder if this propensity for business failures would also infest functions of government that fall into private hands for profit: Social Security, Medicare, private prisons cannot be guaranteed not to fail because profits ensure efficiency in the use of scarce resources. Efforts are afoot to privatize many of the traditional functions of government: schools, roads, prisons, hospitals, etc., on the assumption that business knows best despite their history of failures and bailouts.

Some policies that benefit business harm workers: failure to extend unemployment benefits to the long-term unemployed, right-to-work laws that create free riders and undermine union power, and failure to increase the minimum wage. Further, there is great harm to potential workers from the growing cost of education and efforts to repeal the ACA. By way of anecdote, imagine a student without health-insurance coverage who gets sick. He goes to ER and subsequently receives a bill for $30,000. He does not have a job: It's difficult to get one in this slow-growth economy. His credit score gets dinged. When he graduates from the university, the student applies for different jobs--including fast-food restaurants, supermarkets, convenience stores, nursing homes--and prospective employers check his credit score. None of the thirty places of business where he submitted applications to be considered for employment calls him back after an interview. He suspects his inability to find work can be traced directly to his poor credit score. He is a young man looking for work who has to figure out how to repay his student loan, hospital bill, and otherwise survive without the benefit of a job. The catch-22 here might be quite common considering the magnitude of the outstanding $1.1-trillion student-loan debt.

Furthermore, to see what privatizing Social Security could do to you if you were planning to retire in 2008, consider that the average 401(k) account balance was $114,337 in 2007 and $86,513 in 2008. This represented a loss of 24.3 percent. And if you have bought government securities, you would find the return to them has been almost zero. Of course, you might have had the option of putting off your retirement plans, or if you were already retired, you could find another job. Suppose all of your money were in the stock market, then in addition to a potential loss of 24 percent, you would also have had a terribly difficult time trying to live on near zero-interest income. In fact, lately the Federal Reserve Bank has been teasing you with hints that it will start to raise interest rates. Your interest revenue to supplement your retirement income is not a priority for the Fed. The Fed seems more concerned with keeping interest rates low to benefit business investment and banking profitability. This is, your bank can pay you less than one percent on your money and then turn around and make credit available to you of up to a 21.99 percent rate of interest.

 

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Seymour Patterson received a Ph.D. in economics from the University of Oklahoma in 1980. He has taught courses and done research in international economics and economic development. He has been the recipient of two Fulbright awards--the first in (more...)
 

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