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Is the American economic system strong or not?

A question for Senator Obama

Obamaphiles seem to be going crazy shouting that John McCain has declared the American economy fundamentaly strong. They see this as further proof that Obama is part of the “reality-based community” whereas McCain lives in his own made up world.

But this is just more hyperventilating from the left who would be happy with a devastating depression if only it would help Obama win. But here is what McCain said:

“Today we are seeing tremendous upheaval on Wall Street. The American economy is in crisis. Unemployment is on the rise and our financial markets are in turmoil. People are concerned about our economic future. But let me say something: this economic crisis is not the fault of the American people. Our workers are the most innovative, the hardest working, the best skilled, most productive, most competitive in the world. My opponents may disagree, but those fundamentals of America are strong. No one can match an American worker. Our workers sell more goods to more markets than any other on earth. Our workers have always been the strength of our economy, and they remain the strength of our economy today.

“But their efforts are not being matched at the top. From Washington to Wall Street, the top of our economy is broken. We have seen self interest, greed, irresponsibility and corruption undermine the hard work of the American people.

“It’s time to set things right. When I am President, we’re going to put an end to the abuses in Washington and on Wall Street that have resulted in the crisis we are seeing unfold today.

McCain’s argument is that the American economy is strong because it is based on the hard work and innovation of American workers. He is saying that our free market economy works because it allows for this innovation and hard work to pay off. The problem is that those with power in Washington and Wall Street (and elsewhere) often subvert this system for their own gains. When this happens the problem isn’t the system but those who are abusing it.

More below the fold . . .

The folks at First Trust help put this in perspective:

The key thing to remember here is that the emphasis belongs on the word financial. These financial market problems are not a result of widespread economic weakness, otherwise known as a recession. In fact, real GDP has grown 2.2% in the past year and accelerated to a 3.3% annualized growth rate in the second quarter.The economy is not taking down investment banks; lousy lending standards and the excessive use of leverage are taking down investment banks.

[. . .]

The good news is that this financial earthquake is unlikely to turn into an economic earthquake. The bad loans made earlier this decade did not create a wide spread economic boom; and the realization of how bad some of these loans are will not create an economic bust. The non-housing economy, which is roughly 95% of total US economic activity, has been remarkably stable. In the three years ending March 2005, non-housing real GDP grew at a 2.7% annualized rate. In the three years since then, non-housing real GDP has grown at a 3.2% average annual rate.

In light of this I have a few questions:

  • Does Obama agree or disagree with this assessment? Are we really on the brink of another depression? Or is this mostly a financial crisis growing out of bad financial decisions by a host of actors large and small?
  • How does his plan to increase marginal tax rates and the cost of doing business through increased regulation help stimulate innovation and growth?
  • What specific types of oversight and regulation could have prevented this problem or are likely do so in the future? And why should American trust you to implement them when you have no record of doing so and the companies involved are major campaign donors?

Obama wants to run on an America on the brink of disaster, but voters need to be aware of both the real challenges and the real strengths of the American economy. A knee jerk lurch towards big government liberalism is not the answer.

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