Category: Governor

By Mason Votes Staff Writer Ethan Vaughan

Citing what he called “the worst economic downturn since at least 1982,” George Mason University economics Professor Bryan Caplan said that Republican candidates would likely have a slight advantage over Democratic and Independent candidates going into the 2009 state elections. This is good news for Bob McDonnell (R) and could help explain why Creigh Deeds (D) is trailing in the polls.

“Polls are showing McDonnell leading Deeds in the polls,” Caplan said. “And nationally, Independents are leaning towards Republicans. At first, there was an attitude that [George W.] Bush was president when the crisis began and so it was his fault, but more recently there’s been the feeling that these two presidents share equal blame, that while Bush’s policies may have caused the meltdown, Obama’s have prolonged it.”

Caplan was critical of President Barak Obama’s $800 billion stimulus package, which he says has “done nothing.”

“The stimulus doesn’t actually increase spending,” he said.

Caplan argued that because much of the nearly $800 billion for the stimulus came from government bonds, the majority of which are held by the American people, the federal government was marshalling resources that individuals would otherwise have spent on their own.

“They’re trying to duplicate the effects of the private market,” Caplan said, “and if they do that successfully, then it’s not harmful—it’s useless, but it’s not harmful. Government doesn’t work that way, though; they spend money on stupid things, on things that don’t make sense, things that most people couldn’t explain. They don’t do as good a job as the market would do on its own. In fact, some economists believe that the stimulus has actually made the situation worse.”

Caplan noted that the 2008-2009 downturn was unique among modern recessions because of the presence of deflation. Typically, he said, the U.S. economy experiences two to three percent annual inflation, but has recently undergone 1.4 percent deflation.

The cause, Caplan hypothesized, was most likely individuals hoarding their money. When people do not spent as much, demand for products goes down, prices are lowered, and, in effect, a dollar becomes worth more.

For these reasons, Caplan said, the solution to unemployment was to cut wages.

“Excessive wages are the cause of unemployment,” said Caplan. “If there’s two percent deflation, you’ve just effectively gotten a two-percent pay raise. That also means that if your employer cuts wages by two percent, you haven’t really lost money, but workers don’t see it that way. What’s easier to deal with, though: losing two percent in wages or losing your job? What’s going to be harder on a family?”

Caplan said that the federal government could take several basic steps to put the nation on the road to economic recovery, such as cutting payroll taxes for employers and halting the Federal Reserve’s payment of interest on bank reserves, which he said encouraged banks to hold their money rather than loan it.