Monday, February 23, 2009

Manic Depression

Those of us who worry about whether the White House and the Congress are doing the right things to end the recession as quickly as possible could use some reassurance.

So far it seems as though, wherever people have behaved irresponsibly and blown huge amounts of money, the government's solution is to give them more money. Bankers make zillions of loans to people who likely cannot repay them? Give them more money. Car companies run their business at a loss that shows no sign of abating? Give them more money. People take out mortgages for homes they cannot afford? Give them more money. Congress runs up huge deficits during the Bush years? Then run up even bigger deficits during the Obama years.

Okay, I'm oversimplifying. Obviously, people who look at things the way I have just described are not sophisticated enough to understand how the economy works. The experts tell us that government spending and relief for people in bad mortgages are necessary to improve things. Or, even if they aren't, then they are still better than doing nothing. If only I was smart enough to understand.

Okay, I'm not that stupid. I get it. Sometimes in your personal life you have to go into debt to buy yourself some breathing room to dig yourself out. You then work like a dog to support yourself and service your debt, but it's something you've got to do to avoid losing the roof over your head or starving. And sometimes in a crisis, people who are doing okay have to help out other people who aren't doing okay. And maybe it's not exactly fair, but we do it because it's the right thing. After all, the next time it might be us who are the ones that need help, and we have to hope that someone else will help us out if and when that time comes. I think we all get that.

So, let's put aside the question about whether the stimulus package and the mortgage bailout plan are fair. Let's just focus on whether they will actually work. Will they help the economy recover more quickly? Will they cause less harm than simply doing nothing? And, most importantly, what will enable the most people to support themselves and enjoy a rising standard of living?

If only there was some country that had gone through a similar situation and had tried a similar solution. Maybe we could learn from that experience. Even better, what if there were two countries that had similar situations and two different solutions were tried and we could see which one worked better? Wouldn't that be helpful?

Wait, there are two such countries. Wait, no, they are actually both the same country. And they are both us, the United States. We have actually been through this at least two times before. And the government dealt with the crisis very differently in each case. In 1920 there was a recession when Warren G. Harding was president. National productivity fell by 24 percent and unemployment shot up. Harding cut taxes, decreased regulation and lowered government spending. The recession ended after a bit less than three years. Now that seems like an awful long time to suffer through a bad economy. But there was an amazing period of growth from 1923 to 1929. Then another recession hit, and President Herbert Hoover raised taxes, increased government spending, regulated industry and jacked up tariffs. From 1933 Franklin Roosevelt essentially continued and extended Hoover's policies, and the bad economy lasted until at least 1939, i.e. a full decade.

The problem with comparisons like this is that there is always some difference between the two situations that proponents of one economic philosophy or another can cite to claim that the current situation is somehow materially different. Supporters of increased government spending as a solution argue that the Great Depression lasted so long, not because of increased government spending, but because FDR did not spend enough or spend it fast enough. And since it is virtually impossible to prove a negative, there is no way to say absolutely that they are wrong.

But here is something that we can say. If President Obama's strategy works, it will be the first time a government has spent its way to national prosperity. In spite of all this spending, the president has promised to cut the deficit in half by 2013. For this to work, he has to be counting on some major growth despite the fact that the government has tied up so much of the GDP. Or he is planning to close the gap by raising taxes, presumably on the wealthiest 5 percent (since he has promised that 95 percent of us will have lower taxes) or on businesses. But experience shows clearly that this is a disincentive to productivity and growth. It's hard to see how we are not headed for a decade or more of depression.

Normally, a bad economy is considered the kiss of death for a president, but the irony is that Obama might come out of this okay politically. After all, if we remember President Harding at all today, we remember him for something called the Teapot Dome scandal. And FDR is not remembered so much for how long the Great Depression dragged on under his watch but for how much he cared about the people suffering through it.

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