Thursday, January 08, 2009

The Politics of Fear

President-elect Obama in a speech (full text here) at George Mason University today called for “dramatic” action on the part of the Federal government in response to the U.S. economic situation. The basic premise of his speech is one that we’ve heard many times in the last few months. We heard President Bush present it when he called for the initial $700 million “bail-out” package for key Wall Street financial institutions. He reiterated it when he bypassed a grid-locked Congress to extend TARP funds to the Detroit Big Three. And today Obama gave the same justification:

I don’t believe it’s too late to change course, but it will be if we don’t take dramatic action as soon as possible. If nothing is done, this recession could linger for years. The unemployment rate could reach double digits. Our economy could fall $1 trillion short of its full capacity, which translates into more than $12,000 in lost income for a family of four. We could lose a generation of potential and promise, as more young Americans are forced to forgo dreams of college or the chance to train for the jobs of the future. And our nation could lose the competitive edge that has served as a foundation for our strength and standing in the world.

In short, a bad situation could become dramatically worse.

This is the “government can’t sit by and do nothing” argument or as I like to call it, the “Doomsday scenario.” It consists of positing some sort of unnamed, nebulous “worst case” scenario, claiming that this scenario is what we face in the absence of any action, and then claiming that government must act to prevent such a scenario. It is a spurious argument, and the key to its success lies in two key aspects.

First, it relies on the fear of such an event as a motivator for action. Notice that he provides no discussion of the mechanism by which this disaster will come to pass, but only dire predictions of the result. This is the basic premise that should be questioned of course, but the hope is that your fear will be so great, and your ignorance of the situation so blinding that you’ll not question it. Note that if we do not face such a dire situation, that the basis for “dramatic” action becomes questionable.

Second, its success also relies on the fact that once action is taken one can’t confirm if the original premise was indeed true. This makes it almost impossible to appear to “fail".” Let’s say that we are indeed headed for a “cliff.” By what measure will we determine if government action actually succeeded? Well, the economy won’t fail. But isn’t this the exact outcome we would expect if there were in fact actually no “cliff?” How do we tell the difference between those two scenarios? We can’t. And so the average person is bound to conclude that the stimulus package actually worked.

This whole line of thinking is simply a enticement to help us get used to the idea of looking to government to solve our problems. In fact, Obama brazenly claims that government is the only way out of the dilemma.

There is no doubt that the cost of this plan will be considerable. It will certainly add to the budget deficit in the short-term. But equally certain are the consequences of doing too little or nothing at all, for that will lead to an even greater deficit of jobs, incomes, and confidence in our economy. It is true that we cannot depend on government alone to create jobs or long-term growth, but at this particular moment, only government can provide the short-term boost necessary to lift us from a recession this deep and severe. Only government can break the vicious cycles that are crippling our economy – where a lack of spending leads to lost jobs which leads to even less spending; where an inability to lend and borrow stops growth and leads to even less credit.

That is why we need to act boldly and act now to reverse these cycles. That’s why we need to put money in the pockets of the American people, create new jobs, and invest in our future. That’s why we need to re-start the flow of credit and restore the rules of the road that will ensure a crisis like this never happens again.

We can’t depend on government to create jobs at all. Don’t buy this line. The irony, of course, is that both this stimulus and the original TARP package will only end up hurting the economy more. Of course we now have the momentum of the precedent set by the Republican administration fueling a Democratic spending binge. This is nothing but the justification for a money grab using your taxpayer dollars. Don’t stand for it.

We are not headed for a cliff. The best thing the government can do for the economy is let it recover on it’s own. University of Michigan economist Mark Perry has been collecting data to quantify how big this economic crisis is at his blog Carpe Diem. It is a much needed antidote to fear, and I suggest following it for a while. In this post (check the comments) you’ll see that looking at the volume of bank failures in nominal dollar value, we have yet to see as much bank failure as occurred in the S&L crisis in the late 80’s. There certainly is economic stress, but it is not a Doomsday scenario. The best thing the government can do is “laissez faire!”

1 comment:

softwareNerd said...

Even after decades of Keynesian failure, and inspite of many volumes written on the subject, this core problem does not go away: too many people still think government spending is an answer.

Even many critics accept the premise. Their objections usually are about the size and the duration. They agree that government must help in the short term. Their objection is that it must only be in the short-term.

Playing to this opposition, Obama and his team have been stressing that they are going to be fiscally conservative in the longer-term. Just words, without substance, but enough to undercut the objection of people who mostly agree with today's action and are only afraid about tomorrow.

Left to itself, the U.S. would likey save more than it did in the last decade. this means more money being spent on factors of production. A period of falling real wages is possible, but that would simply make the U.S. more competitive. ... etc. Instead, the Democrats and republicans plan to stifle all this corrective action.