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Palin gets it, but the bailout makes it worse

By Howard Richman, Raymond Richman, and Jesse Richman
web posted October 6, 2008

In the Vice Presidential debate last Thursday, Governor Sarah Palin showed that she understood exactly what is at the core of our nation's economic crisis. She told the American people that it's time for them to start saving:

 [L]et's commit ourselves, just everyday American people, Joe Six Pack, hockey moms across the nation; I think we need to band together and say, "never again." Never will we be exploited and taken advantage of again by those who are managing our money and loaning us these dollars. We need to make sure that we demand from the federal government strict oversight of those entities in charge of our investments and our savings and we need also to not get ourselves in debt. Let's do what our parents told us before we probably even got that first credit card. Don't live outside of our means. We need to make sure that as individuals we're taking personal responsibility through all of this. It's not the American people's fault that the economy is hurting like it is, but we have an opportunity to learn a heck of a lot of good lessons through this, and say never again will we be taken advantage of.

But the very next day in Washington, Congress did their best to undercut any savings that the American people might generate. They passed a plan to borrow about $700 billion which will be given to the banks and securities industry, leaving the Joe Six Packs and hockey moms with the debt.

The bailout bill was not needed at all. The Federal Reserve was handling the liquidity problems, caused by some banks going bust, through loans to banks, not giveaways. Businesses were still able to finance their payrolls and inventories. Small businesses with good credit were not having trouble getting loans. Consumers still had their credit cards. Mortgages and car loans were still available.

The bailout bill claimed to establish provisions "to prevent unjust enrichment by participants of the program." But all of the participants of the program will be unjustly enriched. In fact, their past misbehavior will be rewarded. The U.S. Treasury will buy their "troubled assets" for much more than they are worth so that the same managers who mismanaged their companies to near-bankruptcy can keep their jobs and their power.

Moreover, the $700 billion will actually make America's real economic problems worse because the money will be indirectly borrowed from foreign governments. (With Americans not saving and private foreigners not lending to America, any additional federal budget deficit is indirectly borrowed from foreign governments.) The money involved will be paid for by the U.S. taxpayer who will not only pay interest on these loans, but will also pay for them with U.S. manufacturing jobs!

The Chinese government, for example, lends money to America as part of their currency manipulation strategy. (They buy dollars to keep down the price of their currency and then lend those dollars to the United States.) As a result, Chinese labor is 40% cheaper than it would otherwise be, making Chinese products cost 40% less in America and American products cost 40% more in China. We get their loans and in return they get our industries.

The $700 billion giveaway will not solve the problem that the U.S. economy is stagnating and that unemployment is increasing. In fact, the last giveaway, this spring's $150 billion stimulus package, was accompanied by rising unemployment! What we gained in temporary spending, we lost in long-term manufacturing jobs.

Congress still needs to enact a plan that addresses the root cause of the current crisis, the cause that only Governor Palin is talking about – the over-borrowing by Americans to finance consumption. There are two good plans available that have already been written into bill form and could be immediately passed by Congress: (1) the FairTax and (2) Warren Buffett's Import Certificates Plan which is known as the Balanced Trade Restoration Act.

The FairTax, being a sales tax, encourages savings and discourages consumption, while leveling the international playing field for American products. The Balanced Trade Restoration Act gradually eliminates American borrowing from abroad, while encouraging investment in America's export-oriented industries. Best of all would be some combination of the two, as we recommend in our 2008 book Trading Away Our Future. ESR

The three Dr. Richmans are three generations of economists from the same family and co-authors of "Trading Away Our Future: How to Fix Our Government-Driven Trade Deficits and Faulty Tax System Before it's Too Late."

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