Episode 21: Cold Hard Cash

102808.1640

With the economy in shambles, the presidential election by and large is about how each candidate will address America’s financial future. The democratic and republican candidates have wholly different approaches to the issue but which plan is better?



As I understand it, McCain wants to continue the supply-side economic model, which offers tax breaks to all Americans and businesses, in hopes that the savings will be reinvested into small business, the stock market, and the creation of new business. In order for this model to succeed, it requires the government interferes with the free market as little as possible by way of the deregulation of lending institutions, believing banks should determine whether to issue loans, not government mandates.

I’m not sure what the economic term for Obama’s plan is, but he labels it as “bottom-up economics.” In this plan, there is a tax cut for middle class, working Americans. Those making under $250,000, or 95% of working Americans, would receive tax relief. There would not be any taxes on capital gains, and small businesses get a tax credit when starting a new business. Also there is tax relief for business owners who hire American workers.

In a perfect capitalist system, I believe there is much merit to John McCain’s model. I believe capitalism, the idea that anyone with a good idea can rise to wealth, competition that drives prices down while increasing quality, and the ability to reinvest to create sustainable wealth is what makes America so great. The problem is capitalism inherently has winners and losers. In a perfect system, losers give their idea a shot, and when it fails in the market, they come up with a new idea or they quit. In reality, losers try to cheat their way to get ahead, and winners try to cheat the game to stay ahead. Because of an imperfect system, there is a need for a referee.

That referee is the government. Regulation is essential to ensure the free market system works. Without rules, and punishment for breaking the rules, the free market becomes the wild west – a recipe for disaster that came into fruition with the economic crisis almost two months ago.

McCain’s plan requires a cultural change; a change that encourages shared responsibility. The survival-of-the-fittest model in play is a game of “every man for himself.” This causes a hoarding mentality, as we are more apt to accumulate wealth, and then spend the money on ourselves. When the economy is good, we buy lavish things: cars, jewelry, clothes, etc. However when the economy is bad, we pay our bills. In the end, we do not reinvest money, building a business is difficult, and economic growth is stunted. The true irony of McCain’s plan is Obama’s approach is a necessary pre-requisite to ensuring the success of a supply-side model.

Obama’s economic approach requires a much broader brush stroke to fully understand how it affects our financial future. The first step is to rebuild the middle class. In order to create the kind of growth McCain suggests, it is essential that we have a thriving middle class to mitigate the hoarding mentality. By offering extreme relief to the middle class, middle class spending confidence will be restored. This will get money circulating again, and in the long term end our financial crisis. By providing incentives to hire Americans, more people will be able o go to work. Finally, by increasing spending for infrastructure, even more people will have access to jobs while simultaneously repairing our roads, bridges, and tunnels. Looking at the big picture, this spreads opportunity for economic growth for Americans of all socio-economic status, from labor jobs, to white collar jobs.

Increasing the number of jobs is just the first element. The next element, and the most important element, is redefining the American culture. Obama wants to move from the hoarding mentality to a mentality of shared responsibility. I think his vision is largely based on his beginnings as a community organizer; this is community organizing on the grandest of scales! The first part deals with energizing young Americans to participate in civic responsibilities. One way he proposes is a $4000 credit for college tuition in exchange of doing community service. At first, young Americans will adhere to their hedonistic tendencies, and volunteer only to get money for school. However, over time, young Americans will develop the self initiative to perform civic duties, and help one another.

The second aspect deals with transportation and information technology. By investing in these infrastructures, Americans from all parts of the country become accessible to on another. Broadband access in rural communities means they can earn college credits from home, participate in internet jobs, and build international businesses somewhere in the mountains of Wyoming. Bullet trains, faster, clean, and safer transportation allows us to easily access any part of the country and break down the walls that keep us apart. We can no longer be ignorant of what is going on from state to state, if we hope to compete country to country.

We become a nation inextricably intertwined under Obama’s plan. This plan is dependent on a revitalized middle class. The insinuation, or I suppose outright claim that this plan is socialist is absurd. None of what I described can happen in a socialist system. We need a free market to create the kind of jobs and competition to make any of Obama’s plans work. One people have money, the middle class is revitalized, and our culture has been redefined, it may be possible that a supply-side system may work. However, it is just as possible that we undo our progress, and revert to the hoarding mentality.

These are big picture ideas not even on McCain and Palin’s radar. None of what I write here will come to fruition in 4 years. Should Obama be reelected, we may only see a tiny sprout of this cultural redefinition. But Obama will definitely set the precedent for a better America. We will rise and fall as one nation. Which direction we go is solely up to us.