What would we do to fix the economy?

Yesterday and today President Obama challenged the Tea Party to write what would we do about the economy. It is important to note that this is only a small fraction of what needs to be done, but it is only a start. Here is my letter:

President Obama,

Today you challenged the Tea Party to answer what specifically we would do to fix the economy. While I would never speak on behalf of the tea party, I can write what I believe could have done to solve this crisis, then and now. I will answer this question in two parts. The first will discuss what we should have done as the economy collapsed. The second is what can be done now, after trillions spent on bailouts and stimulus packages.

As the economy collapsed President Bush left everything he ran on. He ran on promoting free markets both here and abroad. President Bush, like President Clinton before him, understood that free markets not only lead to increased efficiency (especially for the poorest amongst us) but also leads to a free people. The greatest economists to ever live have been nearly universal on this point, that free markets are a necessary but not sufficient clause for having a free people. When the markets started to sour, President Bush left all of that economic understanding behind and quickly scrambled to approve a bailout of banks and other large financial institutions. This action, along with the unnecessarily dramatic rhetoric from his administration caused nothing short of a panic. When you tell the market everything is going to be terrible for the next few months/years, they will listen.

We should have handled the entire situation differently. The major problem was not the collapsing housing market; rather it was the contagion effect that that had on the rest of the financial structure. We should have immediately tried to remove all government interference from the housing and banking structure. Unlike some of my more radical economists, I would disagree with ending the fed. We should have immediately moved to wind down Fannie Mae, Freddie Mac, and end the Community Reinvestment Act. This would have hurt the housing market, to be sure, but also would have instilled confidence in the rest of the markets that they would not be nearly as effected because of the seemingly random actions of the government.

The next step should have been to tread more cautiously with the so-called stress-tests. When the government first announced they were conducting stress tests on individual banks, the market did not take it seriously. It was only after the government refused to release the results of these stress-tests that people began to panic. First, the government likely should not have done theses tests. There is already a stress test for the banks, everyday, and it is called the market. If the market does not believe any bank will not survive the downturn, they will soon be out of business as their stock plummets. Using taxpayer dollars for a stress test was unnecessary at best, but was likely far worse creating a wave of panic in the industry, further spreading the contagion.

Both President Bush and yourself also should not have passed any stimulus package. The stimulus packages served to cause further panic (contagion) and confused the signals of the market. Companies should succeed by successfully serving their customers or creating a good that people want to purchase. When the government interferes and states that no matter how inferior the product is, the government will esnsure the corporation not only stay in business, but even turn a profit, it disincentivizes corporations from creating profitable goods or completing profitable services.

In short, President Obama, the government should have responded with a calm rationality and removed the causes of the economic collapse, mainly government intervention in allowing people who are unable to own a home to get a loan everyone knew they could not afford while guaranteeing banks would not lose in the process. Conversely, the government further incentivized bad lending by giving the banks taxpayer money, and even worse, created widespread panic, by doing the equivalent of shouting fire in the crowded room.

What we should do now:

We need to take a few immediate actions to improve the economy, and this country as a whole. The first is to put aside all of the uncertainty that comes from the government selecting winners in the market. This can be accomplished through putting a hold on all undelivered stimulus and bailout money. This money should not be granted and should just be used to pay down America’s sizeable debt.

The next step is to restore the culture of work. We need to take the tough step of limiting the number of weeks someone is on unemployment. Before I go any further, let me first state that my mother, father step mother, aunt, uncle, and two cousins have all been unemployed during this recession or currently are, partly as a result of this recession. I do not say that we need to limit the weeks of unemployment lightly or without understanding the impact of that statement. Studies have now shown, however, that a great deal of people find jobs the week after their unemployment runs out. This would only shock some inside the beltway. Economists understand that unemployment disincentivizes work because they are essentially getting paid to not work. If we force people back to work by either increasing their incentive to work, through tax cuts or disincentivizing not working, by limiting unemployment, or both.

We should also pass real financial reform. The reform bill congress passed and you, unfortunately, signed into law is nothing short of just punishing the successful because they are successful. I, frankly, demand more from my government than pitting us against one another. I demanded more from President Bush and I demand more from you. The following are likely major causes of the financial collapse: Fannie Mae, Freddie Mac, CRA, loose monetary policies and the government propping up banks and encouraging them to make risky bets by, basically insuring against losses with taxpayer dollars. The financial reform bill does not alleviate any of those problems, with the possible exception of the last. The government needs to understand that printing money will not solve any recession, but just postpone it. If the government had passed meaningful reform, it would include changes to the entire list of causes above.

Lastly, and I know this one is going to hurt, we have to stop the government from picking winners in given markets. This is a comprehensive problem and I am sorry is must start on your watch. We need to stop the government from paying subsidizing corn, because it artificially deflates ethanol prices, which leads to American car companies creating “flex fuel” cars that no one wants, and are unrealistic. We need to get the government out of the health care business, not because I hate people without health insurance, but because I want them to have numerous choices in which company can best serve them. The health care bill you signed into law continues the process of both parties to artificially restrict competition in this profitable sector of the economy. Insurance companies are not allowed to compete against state lines so the companies are charging rates above what they should. Instead of forcing people to buy any single insurance company’s plan, let the company’s compete and let the people choose which plans best suits them.

It is also time to let the market decide which new inventions deserve our money and which ones do not. The more the government invests in businesses the market does not believe have a chance of turning a profit, the greater the likelihood the government will interfere with proper market signals and we will end up with greater wastes of resources, like the cars and trucks powered by ethanol. America will eventually become more “green.” This will occur not because of any action of the government, in fact, it will happen in spite of the government. The nation can only become green when the average citizen thinks he can benefit from the new electric car, or solar panels, or inventions we have not even yet dreamed of. If we let the market work, investments will be directed towards areas where there is the greatest chance of success in market infiltration.

President Obama, I hope you understand that I write this letter not out of disrespect but because I have so much hope for this country and our economy. The economy is best served by letting people act in their own best interest, which was the whole point of Adam Smith’s Wealth of Nations.

I pray that this letter finds you well,

George J. Wendt

Masters in Management Candidate Harvard University

Masters in Dispute Resolution Candidate Pepperdine University School of Law

J.D. Tulane University School of Law.