November 4, 2014

Seven Bad Ideas by Jeff Madrick

            In doing research on books for an economic independent study I came across the above referenced title. In this book Madrick argues that the most fundamental ideas that many economist hold was the catalyst that led us down the road of disparity and was the foremost cause of the mortgage and banking crisis that many have dubbed the Great Recession. Madrick claims this occurrence is rooted in economic and political policy that dates back to the latter half of the Twentieth Century. Madrick argues that in the 1970s, due to a bad economy including high inflation, high unemployment, high mortgage rates and political conflicts like the Vietnam War and Watergate, the country simultaneously shifted to a different school of thought due to distrust in the government. One promoted by Nobel Prize winning economist Milton Freidman. This political philosophy promoted a free market economic system while restraining interventionism and as Madrick claims, is the cause our most recent economic crisis.  
            Madrick's first argument opposes the notion of Adam Smith's Invisible Hand, saying that Smith never intended for this to be a principal of his economics and theorized that in an ideal economy it could work. Smith's idea is that when leaving markets alone, the pursuit of self interests will produce an efficient outcome between consumer demand and producer supply. An argument against government interference and for consumer choice. Madrick further goes on to promote more government involvement economically and justifies governments manipulation of the money supply through inflation. Bad idea number two is that economists put too much emphasis on keeping inflation low. Madrick claims that inflating the money supply will lead our economy out of this recession. Lastly, Madrick argues, not surprisingly, against Milton Friedman's stance against government intervention. Asserting irrational claims like the need to raise tax rates. Madrick says that we have one of the lowest tax rates of any major nation and we further continue to press for lower taxes. Large governments that use taxes efficiently are essential for our society and economy to aspire. Big governments of past eras fostered efficient economic policies, it is the weaker laissez-faire governments that have brought about the undesirable outcomes like rent seeking and recessions, arguing high wage economic policy is what would spur our economy. The same economic policies we promoted as a country in the 1950s and 60s. High wages drive demand.
            Its hard to know where to start when so many arguments are flawed. Simply looking at the big picture of the 2008 recession and inflation I believe Madrick has overlooked the cause and effects of inflation. Inflation is simply an increase in the money supply. As the amount of money in supply goes up, the value goes down. When this happens people need more to survive. Thus, rising prices are the result of inflation and a depression is the correction period that follows. The only way to prohibit a depression is to avoid inflation. Inflation was the cause of the Great Recession, not the answer as Madrick explains. Post 9-11 as the government pumped money into the economy to pay for the abroad operations the money supply rose drastically. This money found its way into real estate and caused one of the largest bubbles in history. Because of the excess money, lenders took risks that they wouldn't have otherwise. Shortly before the recession government tightened economic polices raising interest rates. This didn't change lending practices though and shortly following the bubble burst. Quite a different picture from the one explained by Madrick. Governments involvement clearly made the situation worse, not better. A strong argument against interventionism and inflation.     

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