We need to keep our expectations realistic, not just accept the economist-generated estimate of 1.40 for the magic government spending multiplier, recognize that we could stoke up the economy well past the time that recovery is afoot and end up with troubles in the other direction. And, yes, we have to take moral hazard into account as we formulate programs (a comment on an earlier post on this topic, which I didn't fully understand, seemed to misunderstand my position - to clarify, we need to recognize the reality of moral hazard; it shouldn't forestall action, it should force us to create proposals with some care).
All of this is not meant to suggest that we should do nothing and wait for the market to come to the rescue. People are hurting, people who have not been particularly well-served by untrammeled free market orthodoxy. We're beginning to recognize the limitations of that approach, that there are public objectives of a modern society that are not fulfilled by laissez-faire.
Well, most of us are, but not the bible for investors, the Wall Street Journal. I'll grant that their audience is not the public at large, but that's no excuse for specious reasoning that ignores reality. But that's exactly what we find in an editorial today, The Obama Economy. I'll go through this is some detail.
As 2009 opened, three weeks before Barack Obama took office, the Dow Jones Industrial Average closed at 9034 on January 2, its highest level since the autumn panic. Yesterday the Dow fell another 4.24% to 6763, for an overall decline of 25% in two months and to its lowest level since 1997. The dismaying message here is that President Obama's policies have become part of the economy's problem.The drop in the market is, to be sure, troubling, but this is written in a misleading way. We're asked to believe that the market was roaring back in the days before Obama took over, until the world started getting a look at his policies. What is ignored is that most analysts believed the market was coming back because investors were pleased that Bush was leaving. Even taken as it is, the text is poor, because the January 2 peak was the highest since all the way back on November 5, which really wasn't the time of the "autumn panic."
Americans have welcomed the Obama era in the same spirit of hope the President campaigned on. But after five weeks in office, it's become clear that Mr. Obama's policies are slowing, if not stopping, what would otherwise be the normal process of economic recovery. From punishing business to squandering scarce national public resources, Team Obama is creating more uncertainty and less confidence -- and thus a longer period of recession or subpar growth.
The use of the term "become clear" is completely unsupported, and the implication in the second paragraph is by no means perfectly logical. It's hard to see how giving money to failed companies is "punishing business," unless we mean "punishing CEOs," which may well be a concern to WSJ readers.
Then we come across this graph, a fine example of using graphics to obscure reality:
The Democrats who now run Washington don't want to hear this, because they benefit from blaming all bad economic news on President Bush. And Mr. Obama has inherited an unusual recession deepened by credit problems, both of which will take time to climb out of. But it's also true that the economy has fallen far enough, and long enough, that much of the excess that led to recession is being worked off. Already 15 months old, the current recession will soon match the average length -- and average job loss -- of the last three postwar downturns. What goes down will come up -- unless destructive policies interfere with the sources of potential recovery.Again, reasoning based on assumptions, not facts. We have no idea whether the "excess" (in what, the writer doesn't say) has really been "worked off." That this recession is close to the average length of previous recessions ignores the fact that this is very likely a worse-than-usual downturn.
By the way, note the term "job loss" in the above paragraph. It's the only time that employment will be mentioned.
There's some more stuff, not worth quoting, as to how the economy is in pretty good shape (oil prices are low, liquidity is busting out all over, housing prices are close to the bottom). Supposedly, things have been quietly getting better over the past couple of months, except for those nettlesome Obama policies.
I should probably quote a lot more of this thing, but it's discouraging. Oh, OK, maybe a bit more:
We're getting to the gist of this now. It takes a little interpretation, but the "improving incentives to work or invest" essentially means "drop corporate tax rates." "Repair and recovery" means we should just give money to corporations and let them work things out. But even this understanding doesn't help us with all this "reasoning":
What is new is the unveiling of Mr. Obama's agenda and his approach to governance. Every new President has a finite stock of capital -- financial and political -- to deploy, and amid recession Mr. Obama has more than most. But one negative revelation has been the way he has chosen to spend his scarce resources on income transfers rather than growth promotion. Most of his "stimulus" spending was devoted to social programs, rather than public works, and nearly all of the tax cuts were devoted to income maintenance rather than to improving incentives to work or invest.
His Treasury has been making a similar mistake with its financial bailout plans. The banking system needs to work through its losses, and one necessary use of public capital is to assist in burning down those bad assets as fast as possible. Yet most of Team Obama's ministrations so far have gone toward triage and life support, rather than repair and recovery.
Perhaps the imminent Treasury "stress tests" will clear the decks, but until they do the banks are all living in fear of becoming the next AIG. All of this squanders public money that could better go toward burning down bank debt.What does this even mean? I guess banks are afraid they might be taken over by the government, but some of them have already been given money that exceeds their current market capitalization. I can only believe the WSJ supports no-strings contributions to our well-managed financial institutions.
Surprise! They're not fond of the budget either:
The document was a declaration of hostility toward capitalists across the economy. Health-care stocks have dived on fears of new government mandates and price controls. Private lenders to students have been told they're no longer wanted. Anyone who uses carbon energy has been warned to expect a huge tax increase from cap and trade.If health care organizations had found ways to extend coverage and rein in costs, the public wouldn't be demanding change. If they had used some of their massive profits to modernize, making medicine safer, we would be fine with them.
If private lenders were making loans, they would still be in the game. I guess every student is supposed to drop out for a few years while the market sorts it out, then come back to school and go into permanent hock as their bargained-down salaries fail to cover the repayment of those loans.
If energy companies had taken the lead on new energy, if they had devoted their record profits to paying the full costs of their operations, there would be no pressure for carbon taxes or cap and trade.
Of course, we have to get in one political barb:
They seem preoccupied with going to the barricades against Republicans who wield little power, or picking a fight with Rush Limbaugh, as if this is the kind of economic leadership Americans want.It's really hard to see the Obama White House as the obstructionists in the current situation. As I said above, I'm not fully on board with every single thing, but the Republicans have offered nothing but roadblocks and unpleasantness - they're an embarrassment.
What The Wall Street Journal wants, clearly, is a retreat to the glorious days when business leaders called the shots, got whatever they wanted. What that is is a modified free market in which the vast majority of Americans are caught up in creative destruction, while the executives soak up all the marvelous riches that are generated.
But the market is not perfect, it does not inevitably create humane or just outcomes (even Adam Smith didn't believe that). If the current administration ends up going a bit too far in that direction, well, Republicans and Big Business have only themselves to blame. Had they ever put the public's interest ahead of their own, there would be a lot more sympathy for them now that they're on the skids.