Continuing from last week’s post, the second basic economic principle I would like to call into question is the regulation of businesses. I have heard many arguments that limiting the free market will restrict companies from doing the most profitable action. Which is fairly assumed to not help anyone. This restriction is most commonly done by government regulation of companies. Many people will point out that these regulations not only cost money, but they also limit the businesses they are attempting to ‘fix’.
To begin this rebuttal, I feel an example of when deregulation backfired would be best. In 1933 the Glass-Steagall Act was put in effect. This act separated commercial banking from investment banking. By doing so, it created trust in the American banking system, which was a crucial step out of the Great Depression. By having the two separated, less risky financial behaviors occurred and the economy began to stabilize.
** Just to clarify, I do understand that this one act was one of many that existed under the New Deal. And when all summed up, the economic benefits the New Deal caused for the United States was most likely less significant than that gained from World War Two. Regardless, I find this act to be very beneficial through what I have read and the effects of the economy once it was removed. **
Lasting until 1999, this act was eventually repealed in hopes of boosting the economy. With less regulation, banks and individuals were able to more freely take out loans and purchase commodities that they may not have been able to before (Amadeo, 2018). In this time, from 1999 to 2007, banks encouraged individuals to take out high mortgages, which quickly created a bubble in the housing market. Knowing they were insured; the banks had no economic reasoning to prevent this bubble from forming. Once the bubble popped, these loans were then bundled and sold to bigger banks. Which were then bundled again to even bigger banks, until they made their way to the few banks who were ‘too big to fail’ (Reich, 2017). Holding the economy hostage, the government was forced to bail these big banks out knowing that if they failed so would the entire economy.
With the Great Recession costing the average American seventy thousand dollars in their lifetime income (Gibson, 2018), this deregulation proved to temporarily paralyze the economy. And only a decade after the Glass-Steagall Act was removed, in 2010, Dodd Frank put in effect. This act restricted banks more than the Glass-Steagall Act had ever before and government policy was exactly where it was in 1933.
The basic theme of the example above is that when a company is allowed to act freely it will usually harm the economy in the long run. One could attempt to argue that this example is an anomaly or that the principle does not always hold true, but that would be fundamentally incorrect.
Corporations ideally exist in a perfectly competitive market (notice the wording “ideally exist”, this does not reiterate the point of how inequality decreases competition due to rent-seeking). This means that companies are in a constant fluctuation of survival within a market. To do so they need to generate a profit and outperform their competitors.
This is a high-stakes situation, one of which has the sole goal of making money, and nothing more. Of course, some companies can be moral and wish to better their worker’s pay and/or conditions, but unless forced to, they never will. They will not because they cannot. If they do then they are losing potential profits, which would allow a different competitor to outperform the morally good corporation. Thus, we see a basic ‘race to the bottom’ among companies that have the liberty to do so.
**‘Race to the bottom’ refers to the socio-economic low road mentality to address increasing globalization. In an effort to bring corporations and competition to one’s own country, governments attempt to decrease the expenses of starting a business in their country. This can be done through decreased taxation and deregulation of work conditions. **
Hence why regulation to decrease inequality in many ways is actually efficient. By forcing all corporations to think long-term and for the betterment of their workers, the economy as a whole can improve.
By seeing inequality as both immoral and inefficient, it seems clear that something must be done to minimize this issue. The historically common answer would be increasing welfare states. Yet this solution has its limits. Stand Together wrote about this issue when addressing the stress that impoverished individuals every day. Their lack of social stability, dangerous communities, and financial struggles generate a destructive atmosphere for families to develop in (Fijacko, 2018). Hence why so many families struggle to make long-term financial decisions. When living day by day, it can be impossible to see the bigger picture.
** Stand Together is an organization committed to breaking the self-perpetuating cycle of poverty. Their goal is to discover and innovate solutions that uproot the destructive norms and traditions that have developed around poverty. **
This is why I instead advocate for the implication of universal basic income. UBI is a system that gives an equal amount of money to people no matter their social or economic status. By providing a constant stream of income, regardless of people’s employment status, people would not have to carry the burden of economic stress. They would have the means of providing food, clothing, and shelter for themselves, which would allow them to live without the stress of poverty. And in other words, without the stress of survival.
A common misconception with this idea is that people would stop working. This argument may make sense at first, but in areas, this system has been tested no such actions were taken. An example of such is the Alaska Permanent Fund Dividend Program. Providing all Alaskans with two thousand dollars a year, researchers found that full-time employment status has remained the same, and part-time has risen by seventeen percent (Gaskell, 2018). With dozens of other examples proving similar results, it would appear the lower class, once relieved of the burden of poverty, are more capable to set long-term goals and seek employment opportunities.
To sum up both parts of this issue, it seems clear that inequality is much more than just a moral issue. Economic inequality can very clearly be seen as both immoral and, arguably more important, inefficient. These inefficiencies have generated more inequality, which has, in turn, created more inefficiency. Although there does not exist enough data to know for sure that UBI is the right solution (Pistono, 2019), Andrew Yang’s Freedom Dividend appears to be the current best/most realistic solution for America. Giving one thousand dollars to every American every month, these individuals will be able to live a secure life, which is projected to decrease inequality and increase the efficiencies of the market (Kronen, 2019). This policy would allow for both a moral and an efficient economy. One with a growing middle class, unstressed lower class, higher competition in the markets, and higher consumption for all people.
Before I end this post I would like to quickly point something out. As I said at the beginning of my part one post, these are just models and ideas but when it comes down to it, nobody fully understands the economy. So please feel free to reflect with me, or anyone else, on these debatable issues and solutions. Because at the end of the day, nobody knows anything, so we might as well not know together.
Work Cited
Amadeo, Kimberly. “This 1933 Law Would Have Prevented the Financial Crisis.” The Balance, 22 Sept. 2018, www.thebalance.com/glass-steagall-act-definition-purpose-and-repeal-3305850.
Fijacko, Tommy. “The Toxic Stress of Poverty and Its Effects.” Stand Together, 25 July 2018, www.stand-together.org/toxic-stress-poverty-effects/.
Gaskell, Adi. “Does A Universal Basic Income Discourage Work?” Forbes, Forbes Magazine, 5 Mar. 2018, www.forbes.com/sites/adigaskell/2018/03/05/does-a-universal-basic-income-discourage-work/#347689f1541b.
Gibson, Kate. “How Much the 2008 Financial Crisis Cost You in Dollars.” CBS News, CBS Interactive, 13 Aug. 2018, www.cbsnews.com/news/how-much-the-2008-financial-crisis-cost-you-in-dollars/.
Kronen, Samuel. “In Defense of Andrew Yang’s Freedom Dividend.” Quillette, 13 Mar. 2019, quillette.com/2019/03/06/in-defense-of-andrew-yangs-freedom-dividend/.
Pistono, Federico. “The Freedom Dividend: Universal Basic Income in America?” Medium, Medium, 15 Feb. 2019, medium.com/@FedericoPistono/the-freedom-dividend-universal-basic-income-in-america-2439719f24ae.
Stiglitz, Joseph E. Globalization and Its Discontents Revisited: Anti-Globalization in the Era of Trump. W.W. Norton & Company, 2018.
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