“Mark Thoma gives us Joseph Stiglitz and Martin Feldstein being interviewed by Charlie Rose. I listened to it last night, and I found it so chilling that it adversely affected my sleep. Two issues stand out.
1. Both of them are keen on re-working mortgages. Neither of them mentions non-owner-occupied housing or any of the other issues that make re-working mortgages extremely difficult. At one point, Stiglitz says that banks may be postponing writing down loans because they are waiting to see what sort of bailout they might get from the government. But he doesn't draw the obvious conclusion that government interference is the problem, not the solution.
2. Both of them are keen on trying a big stimulus. Stiglitz says that everything done so far has been a failure, but again he doesn't draw the obvious conclusion. Instead, he says we have to try something bigger and different.
I was reminded of the Battle of the Somme, one of the worst policy blunders of all time. Having experienced nothing but failure using offensive tactics up to that point, the Allies [in WWI] decided that what they needed to try was....a really big offensive. Just as Feldstein and Stiglitz pay no attention to the on-the-ground the housing market, the British generals ignored the impact of machine guns on men advancing over open fields.
My guess is that in 1916, anyone who doubted his own ability to direct an enormous offensive involving hundreds of thousands of soldiers would never have made it to general. Similarly, today, anyone who doubts the ability of a handful of technocrats to sensibly allocate $800 billion would never make it into government or the mainstream media.
How many people will have meaningful input in determining the overall allocation of the $800 billion stimulus? 10? 20? It won't be more than 1000. These people--let's say that in the end 500 technocrats will play a meaningful role in writing the bill--will have unimaginable power. Remember that what they are doing is taking our money and deciding for us how to spend it. Presumably, that is because they are wiser at spending our money than we are at spending it ourselves.
…
Once again, I am very happy that we are not fighting World War I. The Paulson/Obama offensives may be squandering resources, sowing confusion in households and businesses, and creating large financial imbalances. But they are not sending young men charging into machine guns.”
Arnold Kling, “The Stimulus and the Somme”, EconLog (8 January 2009).
http://econlog.econlib.org/
Arnold Kling is a noted economist who has worked for the Federal government for many years in different capacities and as a professor at several universities. He is a founder and co-editor of EconLog, a popular economics blog that reflects Libertarian thinking.
Joseph Stiglitz is a professor of economics of a liberal persuasion at Columbia University and Martin Feldstein is a professor of economics of a conservative persuasion at Harvard. Both are well known in the profession and have held high policy positions in government and international agencies. Both have advocated focusing on stabilizing the housing sector as a key to any recovery of the U.S. economy.
Kling is right to point out that everything done to date by the government has failed to improve the overall economic situation. So far, the government has tried to revive the economy by the early and continuing use of monetary policy beginning in 2007 to improve credit conditions, the first stimulus package of early 2008, the various Paulson/Bernanke TARP measures, the bailouts of Wall Street and the banks, the injections of huge amounts of capital into various and sundry financial institutions, the “loans” to The Big Three of Auto, the money given to foreign countries to help stabilize their financial systems, and an increase of several trillion dollars to the national debt. All this is less than a year and a half. Trillions upon trillions of dollars. Spending, tax cuts, grants, subsidies, guarantees, purchases of stock, injections of capital, special appropriations, changes in ownership to the public sector, you name it, every conceivable kind of policy action, all with the same result: Nothing in the way of progress.
But fear not!, the now government tells us. We’re gonna save you! We’re going to double down! Not simply more and more of the same, but a lot more. After all, Stiglitz and Feldstein recommend more. So what if the fiscal deficit exceeds 8 per cent of the GDP? So what if the dollar collapses? So what if we add trillions and trillions to the debt our children have to pay? That’s their problem, and we’ll just take credit for any progress we see.
Then again, maybe all this spending and faux tax relief isn’t such a good idea. Maybe Kling is right. Maybe the banks, the mortgage firms, the auto firms, Fannie and Freddie, and everybody else who expects to be “saved” by the government are simply waiting for the government to act before they do anything, so the situation continues to deteriorate? Maybe our current policies are crippling the economy rather than helping it? Maybe the banks and everyone else would solve their own problems and the economy would perk up, maybe even recover, if we just left it alone? Maybe the best thing that could be done is to have the government tell everyone to deal with your own problems your own way? It would certainly be cheaper.
Unfortuntely, politicians are like World War I generals. They want to be seen doing something, even if doing something is the same old thing that yields nothing and continues to stall a recovery.
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