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Commentary: End of Long Boom may burst Democrat's dreams

This article first appeared in the St. Louis Beacon: November 7, 2008 - The outcome of Tuesday's election was historic in many ways. The obvious is that an African American has been elected to the highest office in the country. It also marks the first time in many years that the Democrats hold the White House, the House and the Senate. Some have already christened this as a new era for democratic policies.

This election also marks the end of an economic era. From 1983 until the present, the U.S. economy has grown fairly steadily. This era of sustained economic growth is so rare in U.S. economic history that John Taylor of Stanford University dubbed it the Long Boom.

The question for many is, "How will the new administration deal with a world characterized more by economic hardship than economic prosperity?"

When the Obama administration takes charge in January, it is likely to inherit an economy experiencing its worst downturn in almost 30 years. This experience, both the problems in financial markets and the slower economic growth, will test competing economic theories.

When elected, Ronald Reagan's views were very much counter-establishment. The government had heretofore taken a substantial role in directing economic activity. There was more regulation, more restricted trade and monetary policy was focused more on keeping unemployment low than on fighting inflation. Reagan, like Obama, was elected as much because of a horrible economy as he was on the promise of a brighter future.

Over the administrations that followed Reagan, government became less intrusive. De-regulation freed up economic resources. Trade with other nations improved dramatically as trade barriers were lowered. The Fed focused more on keeping inflation at bay than on making sure the unemployment rate hovered around 4 percent. The Long Boom raised all boats. Not evenly, perhaps, but one would be hard pressed to show that all groups in society did not enjoy a share of this economic prosperity.

President-elect Obama faces an economic mess. How will he and the Democratic Congress respond?

The platform that swept Democrats into power is a repudiation of the promises that gave Republicans victory in 1980. Instead of calling on the individual entrepreneurial spirit, 52 percent of the voters in 2008 sent the message that they desire more government paternalism to solve our current dilemma.

Government will become more prevalent in regulating markets, providing more entitlements and, if rank and file Democrats get their way, interfering with the free flow of economic resources between nations.

Although the populist nature of the campaign suggested otherwise, more government will not solve the pressing economic problems. Re-regulating financial markets makes for good press but will, in fact, have little effect. Instead of more regulations that smart people will find their way around, why not enforce existing regulations more diligently?

The Obama administration will not be able to provide the government programs promised without significant tax increases, significant redistribution of current spending or both. The new President could face stiff opposition from his own party if he tries to cut pet projects from the budget.

Although fodder for the political stump, increasing taxes on those making more than $250,000 will not be sufficient or successful. Study after study shows that raising taxes on businesses only retards economic development. Raising taxes during a recession would finally provide a true parallel to the Great Depression. Such actions worsened conditions then and would fare no better today.

"We're probably entering a period," writes David Brooks of The New York Times, "in which smart young liberals meet a stone-cold scarcity that they do not seem to recognize or have a plan for." The era of free market capitalism which gave us the Long Boom is over. Idealism must give way to stark realities.

Rik Hafer is distinguished research professor and chair of the Department of Economics and Finance and director of the Office of Economic Education and Business Research at Southern Illinois University Edwardsville.

Rik Hafer is a distinguished research professor in the Department of Economics and Finance at Southern Illinois University Edwardsville and a scholar at the Show-Me Institute.