Uncle Sam is Wearing a Different Hat
Topic: Comparative Economic Systems
Key Words: Economic Recovery, Bailout, and Consumer Spending
InfoTrac Reference ID: CJ186882607
Introduction
The U.S. government has step in to aid in the largest financial crisis since the great depression. Starting with the housing market the sub-prime mortgage mess engulfed the nation in an economic slowdown that began to hurt every rung of the economic ladder. On the surface it is an act that shifts power in the economy toward Washington and away from Wall Street.
Summary
It is not so rare in Europe, where governments often take a more interventionist role in managing the economy, but for the U.S. government to step in, as they have in this crisis, is not the normal behavior. In this case the crisis was severe enough to convince lawmakers to break from capitalistic tradition and use a more European approach to solving the problem. The government step up and spent billions of dollars to finance an economic bailout of epic proportions.
“It is profound, and it is something of a shift back to the state,” said Adam S. Posen, an economist at the Peterson Institute for International Economics. “But is this a recasting of capitalism? I think what we’ll see is that the government acts as a silent partner and gets out as soon as it can.”
Such a bold move by government is an exceptional one, but it does have roots in history. Looking back over the last 100 years the government has occasionally step in and taken stakes in railways, coal mines and steel mills, the auto industry, and has even taken controlling interest in private banks when circumstances indicated it was in the national interest.
In other countries the act of government taking over a private firm or industry is referred to as nationalism. In the U.S. the use of this term is routinely avoided, because it hints at socialism. History shows however, these stakes taken by government in the past were returned to private hands in the end, and capitalism was restored.
Mr. Richard Sylla, an economist and financial historian at the Stern School of Business at New York University explains that historically the government sold the stock of the companies they had taken over to private investors or in the case of banks, back to the banks themselves. He further reports that in the end the government basically broke even, so it cost the taxpayers nothing.
So where does the danger lie in this latest example of government taking shares in the private economy? Robert F. Bruner, a finance expert at the Darden School of Business at the University of Virginia answers the question when he says, “The obvious danger with anything that really starts to look like the government taking ownership or control of a significant piece of an industry is, Where do you stop?”
History would say to stop once you have the economy moving in the right direction again, without fear of a relapse that would throw the economy back into crisis. “The goal is to get the engine of capitalism going as productively as possible,” said Nance Koehn, a historian at the Harvard Business School. “Ideology is a luxury good in times of crisis.”
Source
Steve Lohr, “Intervention Is Bold, but Has a Basis in History”, The New York Times Online, October 14, 2008.
Multiple Choice Questions
1. When the government begins to take control of a firm or industry it is said to be leaning toward:
ANS: ca) capitalismb) individualismc) socialismd) none of the above
2. When the government begins to take control of a firm or industry it is said to be leaning toward:
ANS: ca) be used to decrease the national debt.b) be given back at the appropriate time.c) be sold in the private market.d) none of the above.
Discussion Questions
1. Discuss Ms. Koehn’s statement that “Ideology is a luxury good in times of crisis.”
2. Use any source available to find a definition of socialism.
Instructors Notes
1. A luxury good is a good for which demand increases more than proportionately as income rises. As demand is shifting to the right with increases in income, buyers want more at every price. Ms. Koehn is suggesting that in times of crises ideology does behave like a luxury good, and rich countries tend to want to keep it more than poor countries. The suggestion is that a return to status quo capitalism would be desired as quickly as possible.2. Socialism is considered an alternative to the market system. Socialism is characterized by state ownership of the means of production and the creation of an egalitarian society where wealth and power are distributed more evenly among the community. In the 2008 presidential campaign, Barack Obama was being called a socialist after he made the now famous statement to Joe the Plumber that he wanted to “spread the wealth around.”