The ‘dumbing of America’ and economic policies

With the advent of the Internet and the ability of anyone to write a blog, there has been an explosion of uninformed opinions on the economy published for everyone to read.

Given our nation’s unwillingness to support higher education and the fear of economics courses on the part of most students, the “dumbing of America” is happening before our eyes. Even our congressional representatives pick a piece of the issue on which they have little knowledge and rush to illogical conclusions.

We’re still in the midst of a demand recession. Consumers stepped up purchases in 2010, but not enough to create enough jobs to lower the unemployment rate. So we still need massive government spending, and our massively deteriorated infrastructure needs attention, as does support for higher education.

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But a majority of the voting population is worried about the deficit. And they should be. Most of them want to cut government spending to solve the problem, although recent economic research shows that cutting taxes in the midst of a demand recession does little to stimulate the economy.

The new conservative government of Great Britain is trying that experiment now. The nation’s GDP decreased 0.5 percent in the fourth quarter as they laid off 500,000 government workers, and a double-dip recession might last for most of 2011.

Other countries have taken other paths. Icelandic banks invested heavily in European real estate and they crashed when the real estate bubble burst. The government of Greece borrowed heavily in international markets and put 70 percent of workers on the government payroll. Since government workers don’t produce goods for export or sale, revenues fell and they needed to be bailed out before bankruptcy.

The Irish government kept business taxes low to create an industrial revolution while their banks loaned money to real estate ventures. When the real estate demand dried up, national revenues couldn’t cover the cost of government operations and the cost of bailing out their banks. Portugal, also, is headed toward a bank crisis resulting from the real estate bubble and Spain is treading on thin ice. No one knows what to believe is going on in Italy.

Economic experiments under way

So where does that leave the United States? We’ve definitely proven that the free market is not self-regulating. If companies aren’t forced by regulation to keep some skin in the game, they’ll just pass on the risk and take their commissions and bonuses. We’ve also proven that you can’t finance a war, let alone two wars, with a tax cut. We are in the process of proving that a demand recession is not the same as a supply recession, which can be solved with tax cuts. And we’re pretty sure investment and depository banks shouldn’t be combined.

We expect too much from government in comparison to what we’re willing to pay to obtain it. Some states and municipalities are increasing taxes to finance well-defined goals. Others are cutting services, letting their infrastructure deteriorate and their educational system decline, pushing business and residents into surrounding communities and destroying their construction industry and business sectors. Both these experiments are being carried out in Northern Colorado.

One alternative is to move toward a fee-based system, where users of services pay the costs of providing them. But this doesn’t work with most government functions. Who’s going to repair, renew and modernize our infrastructure? Who’s going to invest in emerging technologies and health-care solutions until they’re proven enough for the private sector to risk major investments? Who’s going to make investments in education to stop the dumbing of America?

Our national debt was about 120 percent of GDP after World War II; it is now about 95 percent of GDP. In 2000, the Clinton administration had created a budget surplus and had begun to pay down the debt. In the 1950s and 1990s, the debt to GDP ratio decreased as the economy rapidly expanded.

The top marginal tax rate for individuals was 94 percent in 1945, 70 percent in 1980, 50 percent in 1986, and 28 percent in 1989. Now it is 35 percent. The top marginal corporate tax rate was 46 percent in 1981, 34 percent in 1988 and has been 35 percent since 1993. But loopholes and offshore tax havens have multiplied, lowering effective rates even further.

If we want to balance the federal budget after the Great Recession, perhaps we should think about top marginal tax rates nearer to 70 percent than 28 percent and about closing the myriad loopholes available to both corporations and individuals.

If we want to solve our many national problems, we all are responsible for being intelligently informed. I personally think all university students should take at least three basic courses in economics – business, journalism and law school students should be required to have five. We all need to be smart enough to see through the idiotic statements made in blogs, in written material, on talk shows and by politicians.

John W. Green is a regional economist. He can be reached at jwgreen@frii.com.