Saturday, October 11, 2008

I am submitting this Letter to the Editor to our local paper:

‘We are going to build the exact same bridge, exactly as before.’, declared the governer of Washington after the 1940 Tacoma Narrows bridge collapse.

‘If you build the exact same bridge exactly as before, it will fall into the exact same river exactly as before.’, replied a noted engineer.

The current economic woes remind me of this story, as over recent decades our ruling ideologues have been busily rebuilding the bridges that led to the great depression.

Now, deregulation has been an enormous economic benefit when, for example, the government partially deregulated the airline industry (eg, stopped setting prices & routes)

Unfortunately, for many politicians, deregulation is a matter of ideology, not reality, and in their drive to “get government off peoples backs”, they started to dismantle the rules implemented after the last great depression to prevent another great depression.

While common sense has kept them from, say, deregulating airline safety (well, not much and not yet), they have certainly been gung-ho in otherwise throwing out the baby with the bath water.

For instance, Reagan railed against government oversight and is often credited with the 1990’s economic boom. Ironically, much of that economic growth is due to policies he opposed. For instance, the Clean air act in 2000 is estimated to have saved some $70 billion per year at a time, when the economy was growing at most $400 billion per year. (I noticed then that many quarterly economic reports credited “unexpected growth in productivity”, not tax cuts nor investments due to tax cuts. By reducing employee sickness and healthcare costs, the Clean Air act increased productivity.)

So what next? In the 1st presidential debate (before the recent economic woes), McCain repeatedly promised to bring prosperity by reducing pork-barrel spending, which is estimated to cost taxpayers some $80 billion per year. It should be noted (after the recent economic woes), McCain supported many of the policies that led to this crisis, the government bailout of $700 billion, and the even higher costs to the world economy. On the other hand, 2 years ago Obama was calling for action about the sub-prime mortgage market, while McCain was calling for less oversight.

It is noble for McCain & Palin to promise to learn from past mistakes, but for the most powerful job in the world, I want someone who shows some ability to anticipate future mistakes.

Friday, October 10, 2008

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.’” (

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: