Friday, February 13, 2009

Econ Test

In his inaugural speech, President Obama memorably declared, "We will restore science to its rightful place." That was great to hear. The last thing we want or need in this dangerous world is politicians that set public policy based on emotion, blind faith or superstition.

I have a humble suggestion for which science in particular his administration ought to begin restoring to its rightful place. It is the one called economics.

Now the problem with restoring economics to its rightful place is the same problem that every branch of science has. And that is the fact that not all of the scientists agree with each other. Lots of learned people with impressive sounding academic credentials keep studying the world's economies and they all keep coming up with different ideas about how it all works and what the best ways are for managing them. That is because there are limits to humans' ability to understand things as complex as the universe, the earth or what happens when lots of people start interacting with each other. But there is something that makes up for an individual human being's inability to grasp all the detail and interaction of the world around him. It is the marketplace of ideas. In other words, the fact that we don't all see things the same way or believe the same things is actually a strength, not a weakness. In the marketplace of ideas, different views of how the world works get debated and argued and their weak points get examined and then these various ideas get tested and everyone can see which ones seem to work and which ones don't.

Now, some people don't like the free marketplace. Maybe they have a particular idea they are attached to and they don't want to risk hearing or seeing that maybe it isn't right, or that there's a better one out there that would require them to give up their own cherished view of things.

Over the past several months, the reputation of free markets has taken a beating. When the housing bubble burst and when the credit system froze up and started causing the economy to strangle, a lot of people said that this just proved what they had always known or suspected: that unfettered free markets are not necessarily in the best interest of most people. More extreme people started asserting that this actually proved that capitalism was not a viable system after all and that it was finally crumbling under its own weight, just as Karl Marx had predicted.

The problem with this view is that the current situation, while aided and abetted by human greed and collective irrational behavior, can be traced directly to government intervention. That is, a government policy of encouraging and pressuring banks and mortgage companies, through Fannie Mae and Freddie Mac, to liberalize loan standards to capture as many new homeowners as possible, regardless of suitability for mortgages, drove up housing prices and resulted in the widespread irresponsible lending practices that got us where we are today. To call this a failure of the market is to call a grocer's errant thumb a failure of his weighing scale.

The real irony is that the government's solution for the economic situation we find ourselves in, which was caused by too many people spending money they didn't actually have is, well, you are probably way ahead of me. It is for the government to do the same thing but on a much larger scale than ever before. History shows that such a course can work if it is targeted and temporary, but the president's and Congress's stimulus bill is neither. Frighteningly, we seem headed down the same course as Japan in the 1990s.

It is a bit late in the day for it, but President Obama might want to look at the precedent of the last Democratic president. Bill Clinton presided over the best economy of modern times. And how did he do it? The man who famously declared in a 1996 radio address, "The era of big government is over," working with a Republican Congress, pulled back on the size of government and, for a brief time, balanced the budget. The Clinton economy did more to improve more people's lives than all the programs in Obama's bloated so-called stimulus bill ever will.

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