Thoughts from Dennis

The recent financial market collapse and the history leading up to it reminds me of the following story:

“After the collapse of the Tacoma Narrows Bridge [Nov 7, 1940], the governor of the state of Washington made an emotional speech in which he declared ‘We are going to build the exact same bridge, exactly as before.’ Upon hearing this, the noted engineer Von Karman sent a telegram to the governor stating ‘If you build the exact same bridge exactly as before, it will fall into the exact same river exactly as before.’” (www.math.ucsd.edu/~aterras/final.pdf)

So the parallels? Consider Ronald Reagan and his drive to deregulate the economy. For him, following the Austrian school of economic theory was a matter of ideology, not of reality. It fit his world view, so he embraced it. And it had a lot of benefits (for instance, it was ridiculous for the government to regulate what food the airlines served on flight). However, over the last 10 years, this ideological drive to deregulate led to the relaxing or eliminating financial regulations that were put into place after the great depression, to prevent another great depression.

So our ruling ideologues ignored the lessons of history and have been busily rebuilding the bridge that led to the great depression!

Ironically, much of the economic growth since Reagan's time was due to things he fought against, not things he fought for. While listening to the news back then, I noticed that economic reports often included statements like "...higher than expected economic growth..." usually attributed to "...unexpected growth in productivity." Now, if this economic growth was due to government tax cuts, deregulation, etc, the growth would not be unexplained: the whole point of accounting is to track the flow of money, and the money from tax cuts could be traced through the economy to tangible benefits. NOW we know that environmental regulations like the clean air act were having a huge benefit to the economy: when the costs & benefits were actually studied (and not assumed) in the year 2000 alone, the clean air act was estimated to be saving the American some $71 billion per year in health care costs, lost productivity, etc. (at a cost of $19 billion). In a $10 trillion economy, that's about 0.7% at a time when the economy was growing 2.5-4% per year.

Clean air act cost-benefits:
(http://yosemite.epa.gov/ee/epa/eermfile.nsf/vwAN/EE-0295A-01.pdf/$File/EE-0295A-01.pdf)

posted by Dennis Sweitzer @ 9:32 AM