Guest Column: Economic Bewilderment

We're in a recession, the housing market is collapsing and we can blame "Reaganomics" for it all, right? Sound familiar? It's all over the news, from popular media right on down to the Diamondback columns such as John Raderman's "The problem with Reaganomics" (March 31). The New York Sun speculates we may be headed for the worst economic crisis since the 1930s. One wonders if any of these reporters bothered to look at the facts.

A recession is generally defined as two consecutive quarters of falling gross domestic product. According to the Bureau of Economic Analysis, the last two quarters saw respective real GDP growth rates of 4.9 percent and 0.6 percent. Total growth in real GDP stood at 2.2 percent for the 2007 fiscal year. So what's with all the media hype? Latching onto recent activity in the housing market, media sources foolishly cry economic disaster, and at such a convenient time: months before the next presidential election. And "Reaganomics" and Republicans are blamed.

The problem isn't "Reaganomics." The problem is a complete lack of understanding demonstrated by countless politicians, journalists and reporters, making columns such as Raderman's more comparable to Hollywood fairy tales than nonfiction documentaries. As such, the lead actor in Raderman's production is Ben Stein. Ironically, Raderman uses a Stein quote to assert "proof" of the folly of supply-side economics from an economic columnist in a news article. What's ironic is that Ben Stein and his father, economist Herbert Stein, are both proponents of "Reagonomic" principles: less government regulation, free markets and lower taxes - principles more appropriately attributed to economists Adam Smith, Friedrich Hayek and Milton Friedman, to name a few.

Ben Stein wrote, "Yes, I wish I did not have to pay so much to fill up my car. [But] the idea that ... Congress can make it better through regulation - that's insanity. To let the free market, the best economic idea in all of history, work its magic - that's good sense." Hoist with his own petard, anyone? Lower tax rates encourage investment, which creates productivity and economic growth while lowering consumer costs. As economist John Lott put it, "If you really want to expand the economy, don't just give people money, give them an incentive to work and invest. The best way to do that is to cut marginal tax rates on individuals and companies. The more people get to keep of what they are making, the more they will work."

In no way does Stein endorse old Keynesian economics emphasizing strong government intervention, merely offering an oversimplified answer for paying off the national debt: The government ultimately takes in more revenue than it spends. This basic concept works for business and households. The problem we see with the government is that it has been growing steadily for the past 70 years or so. Debt piles on as government expenditures increase well out of proportion to tax increases.

Opponents of "Reaganomics" cry for more government spending and market regulation. What's the problem with that? The problem is simple: The government cannot allocate resources and funds as efficiently as private entities. From price controls to subsidies, government intervention inevitably leads to inefficiency and lack of competition and innovation. Yet government spending hovers around 20 percent of total GDP. About 60 percent of that government spending goes to socialist programs: Medicare, Medicaid, welfare and Social Security, all of which continuously suffer net losses. If a private business were run this way, it would fold in a heartbeat. Yet the government continues these programs by incurring further debt, raising taxes and printing more money.

Then there's the housing market. Politicians scramble, trying to alleviate market woes while failing to understand them in the first place. Is further government intervention and more bureaucratic regulation really the answer to market volatility? Residential housing is already heavily government subsidized. Perhaps, sometime in the near future, we'll see the return of basic, proven-effective "Reagonomic" logic in government and media. Until then, the charades will continue, and more journalists, reporters and politicians will assume expertise in subjects they know little about. At least it's fun to watch.

Daniel J. Bianco is a senior economics major. He can be reached at dbianco@umd.edu.