Thursday, November 5, 2009

Henny-Penny and friends, whose careers were ended abruptly.

How Could So Much Be So Wrong? U.S. Monetary and Fiscal Policies, 2008-2009 (continued)

7. We’ve got to do something

We need to compare the cost of this package against the cost of doing nothing. The cost of doing nothing would be catastrophic!

Wisconsin Congressman David Obey.

We can’t afford to wait. We have to act. Presidential spokesman Robert Gibbs.

“I do try to put a lot of weight on what people are saying,” Watt said, referring to the overwhelming opposition of his constituents. “But in this case, I think a lot of people don’t know exactly why a bailout is necessary… On this issue, we have heard the top two economic authorities in the world tell us we’re on the verge of a calamitous event.”

North Carolina Congressman Mel Watt.

Were the massive government responses to the economic downturn in the interests of the public, i.e., for recovery, or simply political, i.e., to assure voters that government was not unresponsive; there would not be a repeat of the do-nothing Hoover administration, as it has erroneously come down in history.

We know the futility of the former. A small part of the so-called stimulus packages was directed to the short term, and that part (such as temporary tax breaks) was known to be ineffective (see this blob for September 23 and 29). The best we can hope for is that they will do little harm, that they will, as George Selgin suggests, be like Granny’s cure for the common cold: work in a week to ten days (The Beverly Hillbillies). (It now looks like we’re out of the recession after 6 quarters – IV/2007 to II/2009 – with a fall in real GDP of 2.8%; compared with the most similar post-WWII recession of 3.2% in 5 quarters, IV/1973 to I/1975. Government either shortened or lengthened the recession, depending on your point of view.)

History suggests that the political motive is also futile. Polls, letters to Congress, and the Tea Parties on tax day (April 15) indicated that many, probably most, Americans opposed the government’s actions. More important to those who will run for reelection, votes have depended not on good intentions but on actual economic conditions (Fair 2009). As the lawyer played by James Mason in The Verdict said to his young assistant: “You’re not paid to do your best. You’re paid to win.” Government actions during recessions have varied from highly (e.g., Hoover) to not very (e.g., Carter and G.H.W. Bush) active (see Hoover 1940, 97-119; Wood 2005, 204-11; Carter 1995, 541; Keech 1995, 69-70). Much more constant, at least since Martin Van Buren, has been the failure of reelection attempts during recessions, whatever the efforts to forestall them, notably in the 20th century, Hoover, Carter, and G.H.W. Bush. The 1990-91 recession had officially ended, but unemployment continued. “It’s the economy, stupid,” was Clinton’s successful slogan in 1992.

The lesson is that mindless action is politically futile – at best: spending loses votes (Peltzman 1992).


Ray Fair. “Presidential and congressional vote-share equations, "American J. Political Science, Jan 2009.

Jimmy Carter. Keeping Faith. Memoirs of a President. Univ. of Arkansas Press, 1995.

Herbert Hoover. Memoirs: The Great Depression, 1929-41. Macmillan, 1952.

William Keech. Economic Politics. The Costs of Democracy. Cambridge Univ. Press, 1995.

Sam Peltzman. “Voters as fiscal conservatives,” Quarterly J. Economics, May 1992.

George Selgin. “Did Bernanke save us from another Great Depression?” Christian Science Monitor, Sept. 17, 2009.

John Wood. A History of Central Banking in Great Britain and the United States. Cambridge Univ. Press, 2005.