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IN-DEPTH ANALYSES AND COMMENTS


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ECONOMIC FREEDOM INDEX 2010

The Asian countries are on the top of the index. North America remains the biggest territory with free economy. The European economic freedom leader, Ireland, is with the highest budged gap for 2010 among the European countries... | read |

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KEYNESIANISM DOES NOT WORK

Washington have approached this economic downturn with old-fashioned, Keynesian economics. Keynesianism batteles the economic downturn by pumping money into the economy encouraging demand and creating jobs. The result of the recent Keynesian stimulus bills is the longest recession since World War II - 21 months and counting-with no clear end in sight, Peter Ferrara adjudicates in an article for the Wall Street Journal. (Ferrara is a director of entitlement and budget policy for the Institute for Policy Innovation, served in the White House Office of Policy Development under President Reagan, and as associate deputy attorney general of the United States under the first President Bush.)

The Obama administration is claiming success not because of recovery, but because of the slowdown in economic decline, notes Ferrara. The fallacies of Keynesian economics were exposed decades ago by Friedrich Hayek and Milton Friedman. Ronald Reagan's decision to dump Keynesianism in favor of supply-side policies-which emphasize incentives for investment-produced a 25-year economic boom, he argues. That boom ended as the Bush administration abandoned every component of Reaganomics one by one, culminating in Treasury Secretary Henry Paulson's throwback Keynesian stimulus in early 2008... (read in depth)

FEDERAL RESERVE MUST STAY INDEPENDENT

In the midst of the ongoing financial crisis, Congress is now considering a bill that would subject the Federal Reserve to congressional audits. It would be a shame to let that happen, argues Alan Blinder in The Fed's Political Problem: How Politics Threatens U.S. Monetary Policy (Foreign Affairs,September 2009). Blinder, who is a professor of Economics and Public Affairs at Princeton University, says that monetary policy should be protected from Congressional politics. The real danger for American economy is not the big government, but its exposure to interest groups and partisan biases. Federal Reserve is one of most independent institutions, it works better in politics-free zone... (read in depth)

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The U.S. history showed that Big Government does not help recovery nor shortens the recession, says Alan Reynolds from Cato Institute. In an article for The Wall Street Journal he refutes Paul Krugman's theory that in this recession the Big Government saved America. Recessions always ended without government prodding, long before anyone heard of Keynes and long before the Fed existed, says Reynolds. On the contrary, recessions have become longer as the U.S. government (and the Fed) became larger, more expensive, and more involved in the economy, he adds.

Reynolds supports his arguments with historical data that proves that the normal length of recessions does not change when the government intervenes; he also gives the example of Sweden, Italy, Germany and the U.K where the government is bigger and where four of the five deepest contractions happened. Market is a self-correcting system and government should not meddle in it to make it more efficient. This is the basic neo-liberal truth... (read in depth)

Bruce Bartlett's opinion is different. Bartlett, who is a former Treasury Department economist, insists that the conservatives and neo-liberals are wrong to explain the recession only as a result of private business mistakes and so the private business should be leaved alone to fix the economy. The punishment of falling revenues, bankruptcy and unemployment will teach people and prevent them of doing future mistakes. But the workers are not responsible for the mistakes of their bosses, says Bartlett, and the basic fairness and compassion demand that something be done to aid those who suffer collateral damage from economic crises.

Bartlett is questioning the fundamental neo-liberal premise that the market does not make mistakes. If it is so why self-correcting did not happen, asks Bartlett. Why did so many business people mistake?

Conservatives blame Fed for the present crisis because it was keeping the interest rates lower than necessary. So if government, of which the Fed is a big part, is primarily responsible for the recession, then where is the logic in saying that private businesses, workers and investors must bear 100% of the burden of adjustment with no assistance from the entity that caused it? (read in depth)

In an article entitled "A Government Failure, Not a Market Failure," John H. Makin, a neo-liberal and a visiting fellow at the American Enterprise Institute, supports the idea that the government was the source of the present economic crisis.

Free market is the only possible system that can achieve the so called "Pareto optimality" or an environment where the economic resources are allocated in places where they will produce the greatest good, says Makin. Every intervention - by government or monopolist - in the natural order created by the free market causes distortions in "Pareto optimality."

Makin argues that the government is responsible for the recent housing bubble; government subsidies had been pushing house prices up to the point where the burst was inevitable. The existence of such subsidies was result of the widely supported idea that home ownership is a public good that can be achieved by government interventions in market mechanisms.

"Subsidies for home ownership-in the form of full deductibility of mortgage interest, lower mortgage borrowing rates derived from government guarantees for mortgage lenders like Fannie Mae and Freddie Mac, and deductibility of local real-estate taxes-have long benefited those who own homes at the expense of those who do not," says Makin.

"The distortion of the market introduced by government intervention can and must be brought to an end. The market that would take its place after this dramatic and admittedly difficult change would allow Americans to allocate their resources more effectively," is Makin conclusion. (read in depth)

 
 
 
 

In a critical to Barack Obama's policy article, published in the National Review, Victor Davis Hanson says that the American President is not a pragmatist, nor even a liberal, but rather a statist.

Hanson, who is a senior fellow at the Hoover Institution, is against the new policy of re-distribution of wealth in which, as he argues, the new social programs will consume 70 percent of the income of the top 5 percent of taxpayers. Hanson does not agree that this is a public good; he does not think that managed from above equality is the right policy for America. Hanson argues that redistribution and equality is not typical for American tradition.

He warns that when radical leaders enforce equality the results are unjust redistribution of property, stigmatization of the wealthy, increase of political fights, radical growth in government and government employment, and economic stagnation. (read in depth)

In The Spirit Level: Why Greater Equality Makes Societies Stronger, Richard Wilkinson, a professor of medical epidemiology at Nottingham University, and Kate Pickett, a lecturer in epidemiology at York University, expose their findings about the connection between inequality and health.

Their research shows that inequality in wealth is bad for every social group, poor or rich. For example, rates of mental illness are five times higher across the whole population in the most unequal than in the least unequal societies.

Societies where incomes are relatively equal have low levels of stress and high levels of trust, so that people feel secure and see others as co-operative. In unequal societies, by contrast, the rich suffer from fear of the poor, while those lower down the social order experience status anxiety, looking upon those who are more successful with bitterness and upon themselves with shame. (read in depth)

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No right or left theories would save the future of U.S. capitalism, but the revival of traditional work ethics that was a unique feature of American culture from its beginning to the mid-twenty century.

America was built on the fundaments of protestant work ethics of the first settlers. The first settlers, most of them members of different protestant sects, created the specific set of democratic institutions and lived in a cultural environment that praised hard work, abstention, thrift, individual responsibility and honesty.

The protestant ethics was the fundament of American capitalism until the 60s. In the middle of 20th century there were a number of reforms, including in school system and state institutions, which estranged the old values with new postmodern theories exalting self-centered individualism, hedonism and moral relativism. Although the 60s were years of vibrant social engagement they have also brought a new culture. In the 70s and 80s the greed mentality, the lack of moral constraint in business, fueled by Hollywood movies and mass culture, replaced the "dull" values of old times.

If we consider Adam Smith's and Max Weber's ideas on capitalism we will agree that capitalism is not an economic system but an expression of specific culture where the moral, ethics and empathy play leading role.

If the capitalism is a cultural phenomenon what can save the virtues of American capitalism today? American churches are engaged in debates such as gay marriages and abortion, the schools with their "child-centered approach" produce increasingly self-centered generations of young people, the mass culture of Internet, TV and movies is obsessed with material wealth and physical appearance.

The financial bust reminds us that free markets require a constellation of moral virtues writes Steven Malanga, an editor of City Journal and a senior fellow at the Manhattan Institute, in a recently published essay. In his writing Malanga does not offer any remedy for the present cultural decline of America. But he succeeds to draw a good picture of the past and present of American work ethics. (Read in depth)

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The Big is better! The big companies, the regulation and removal of anti-trust protection is good, argues Michael Lind, a policy director of the Economic Growth Program at the New America Foundation, in an article, "The Case for Goliath," published in Democracy Magazine this summer. His words would be taken with mockery or even suspicion only a year ago, but today they are part of the growing intellectual trend toward Keynesianism.

Lind is sympathizer of the so-called "utility capitalism," in which "protection from both competition and antitrust permitted firms in many regulated sectors to pay high wages to unionized workers, provide universal service to rural and poor customers, and, in some cases, fund R&D on a massive scale."

The rise of big corporations, holds Michael Lind, is good for the innovations, business financing and organized labor. The big company also is in a better position in global market than the small and middle size companies.

To support his views Lind explains Schumpeter's theory of "creative destruction" as a capitalist progressive movement from small business organization such as craft shops to highly organized titans such as US Steel.

Lind also reminds us William Baumol's theory that small business and individual entrepreneurs are no longer the sources for innovation; according Baumol the prices as a motor and leading principle in capitalist development have been replaced with technology and innovation. Today only big corporations can afford research and development, so the progress is in their hands.

Regulation is good for unions, too, says Lind. It is easier for workers to be unionized in the big companies.

Lind suggests establishing "utility capitalism" in practically every economic sector of US economy: banking, the capital-intensive traded goods sector, the commercial infrastructure sector and services.

But whether Lind is right? Every extreme ideology is wrong. The ideology of market fundamentalism nearly provoked global economic chaos, but the ideology of neo-socialism, that is the other name of "utility capitalism" which Lind suggests, is invoking again the evil specter of organized servitude. MORE

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The United States economy is now out of the emergency room and appears to be on a slow path to recovery, but enormous dosages of monetary medicine continue to be administered and, before long, we will need to deal with their side effects, said Warren Buffet in article for The New York Times. He quoted J.M.Keynes's words: "By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens..." We don't want our country to evolve into the banana-republic economy described by Keynes, said Buffet. MORE

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The American politicians - Democrats and Republicans alike - began deregulating the U.S. financial system in the 1970s. Their premise was that regulations devised during the 1930s-specifically the Glass-Steagall system, which defined separate spheres for commercial and investment banks-would hinder the effective workings of contemporary financial markets. The politicians and economists who advocated financial deregulation were right to think that the financial system in the late XX century has become infinitely more complex since the 1930s. The point they missed was that the financial markets cannot operate unregulated. In his classic book Manias, Panics and Crashes, Charles Kindleberger argued that the financial crises are a constant feature of unregulated financial systems. Kindleberger argues that in an anarchic free market the rationality is not necessary the prevailing behavior. The panic, the irrational lending and investment illusions cannot be cured with lack of basic order and control. Kindleberger found that from 1725 onward financial crises have occurred throughout the Western capitalist economies at an average rate of about one every eight and half years. MORE

 
 

 
 
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