Economics

Repeating Our Economic Woes

It's time to stop the cycle of spending

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We all know how we got into this economic mess. We spent too much, borrowed with abandon, and acted like the bills would never come due. So what's the prescription for getting out? Spending more, borrowing more, and acting like the bills will never come due.

When something sounds too good to be true, it usually is. This alleged cure deserves special scrutiny because it invites our policymakers to redouble the very policies that caused the crisis. Congress and the new administration are all too eager to abandon restraint so that we can overcome the consequences of excess.

Take mortgages. The current recession stems from the popping of the real estate bubble, which came about because too much money went into housing. But now the Obama administration and House Democrats are pushing to assure more investment in housing.

They intend to raise the limit on loans that mortgage giants Fannie Mae and Freddie Mac can buy from $417,000 last year to $729,750 in some markets. And James Lockhart, who oversees the two companies as head of the Federal Housing Finance Agency, told The Wall Street Journal they should accept a lower rate of return than in the past in order to help Americans buy homes.

But it's worth remembering where our problems began: with an oversupply of housing. Channeling more funds into the residential sector will encourage more home building, which will worsen the glut, which will push prices down even further and generate more foreclosures, which will deepen the recession.

The sad reality is that the housing sector has gotten too big and will have to shrink. A lot of people who prospered from catering to the inflated demand for housing, from carpenters to real estate agents, will have to find new ways to make a living. That's what the end of a bubble means.

But plenty of people in Washington are nostalgic for the good old days. It's not just in housing. The Treasury and the Federal Reserve had to inject hundreds of billions of dollars to shore up banks battered by loans that went bad—toxic debt, it was called. So we want banks to be more prudent, right? Wrong. Congress is complaining that banks that received federal aid are being overly stingy.

Well, yes. If a lot of your loans go bad, it's a sign that you need to exercise more care. That's especially true during a recession, which can wipe out companies that once were profitable. Any bankers who want to keep lending at the rate they did before are asking to become insolvent, and more insolvent banks would drag down the economy.

The economy foundered partly because we were too dependent on debt to finance current consumption, and that was unsustainable. But burning some $825 billion on fiscal stimulus, as President Obama proposes, means more of the same. We will be borrowing money to prevent a decline in our current standard of living. That money will eventually have to be paid back, which will require a decline in our future standard of living.

One defense of the stimulus package is that it will finance needed investment in infrastructure and other public goods. Unfortunately, government spending is particularly prone to waste because governments, unlike private companies, don't have to worry about going out of business if they spend unwisely.

This round of spending is sure to be even more wasteful than the norm. Why? Because the government is in such a hurry to get it done, making it harder to vet projects properly. So the return on investment will be lower than usual, and maybe negative.

All this federal spending is supposed to stimulate the economy. But plenty of reputable economists are doubtful. And even if the old-fashioned Keynesian approach is sound in theory, it is probably useless in practice. The Congressional Budget Office says only 7 percent of the infrastructure money requested by Obama will be spent by September. Less than half the highway funds would be spent in the next four years. Most of the outlays will come after they are no longer needed.

But practical realities are no match for our desire to keep living beyond our national means. We spent our way into this mess, and it's too tempting to think we can spend our way out.

COPYRIGHT 2009 CREATORS SYNDICATE, INC.

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  1. Yes, there are economists who think the recession can be fought using monetary policy, but there’re aren’t many of them and they can’t support their gut feelings with rational arguments. When I see Marty Feldstein and other Republican economists backing a big stimulus package, I tend to go along. I was born during the Great Depression, I heard stories about it all through my childhood, and I don’t want to repeat it for the sake of Steven Chapman’s libertarian principles.

  2. Whoa, I’m not aware that there are any economists of note that don’t think monetary policy has a role in fighting the recession…

  3. As long as the debt is being run up by The Smart People, we’ll all be OK.

  4. I’m actually glad that a bunch of the money will be spent on infrastructure down the road, rather than throwing it at any blueprint they can get their hands on now. So long as we all know the stimulus will fail, we hopefully won’t end up with nothing but a bunch of parks, swimming pools, and theaters to show for it.

    Of course, this is relative to the fact that they seem to want to spend a trillion dollars one way or the other, so it might as well be on useful things.

  5. Stan,
    It’s not a matter of “fiat iustitia, pereat mundis”

    but rather “fiat iustitia, ne pereat mundis”…

    read about the policies that were actually followe during GDI

  6. Good one, domo.

  7. “So what’s the prescription for getting out? Spending more, borrowing more, and acting like the bills will never come due.”

    Yeah it’s funny to hear the same politicians who’ve been bad mouthing the banks for irresponsible lending practices demand that they now start pushing the TARP money they got out the door to more deadbeat borrowers.

  8. Hey, if Obama wants to spend $1 trillion, why not just give every person over 18 $10,000?

  9. why not just give every person over 18 $10,000?

    Or how about a two-for-one split! got a buck? Now you have two bucks! Yeeha! Plus a bonus of fifty cents for every window you break.

    -jcr

  10. even if the old-fashioned Keynesian approach is sound in theory,

    It isn’t, and it never was. It only sounded good to ignoramuses who were looking around for any possible rationalization for fascism.

    -jcr

  11. “It isn’t, and it never was. It only sounded good to ignoramuses who were looking around for any possible rationalization for fascism”

    It also sounds good to the sponge, leech and parasite class who are always looking for some way to get a handout of somebody else’s money.

    Exhibit A for that group is the video of that illustrious Obama supporter Peggy the moocher.

  12. No matter how bad things get, America will never have a libertarian President or a libertarian majority in Congress. Since the Republicans have basically abandoned any vestiges of fiscal responsibility, I’m not sure how libertarian economic ideas have any relevance… even if they are sound.

  13. “Hey, if Obama wants to spend $1 trillion, why not just give every person over 18 $10,000?”

    Or give us a tax holiday.

  14. oops – broke the damn page… fragile thing…

    Scooby, why not indeed. In fact tax breaks are akin to that. more efficient than public works projects, more immediate too. If we are going to have fiscal stimulus – it’s as good a way as any.

  15. Hey, if Obama wants to spend $1 trillion, why not just give every person over 18 $10,000

    If everyone get’s the same prize it would violate the important socio-economic principle of “Life’s Lottery”.

  16. “Scooby, why not indeed. In fact tax breaks are akin to that. more efficient than public works projects, more immediate too. If we are going to have fiscal stimulus – it’s as good a way as any.”

    Yes but it doesn’t achieve the primary objective of the Democrats – to reward their targeted constitiuency groups with handouts of other people’s money in exchange for their votes.

    All their yapping about fixing the economy is just cover for that primary objective.

  17. Gil, a giveaway of a fixed amount – when taxes are based on a %age of income – is a highly progressive a redistributionist policy. fits their objectives juuuust fine. Ill be shocked if something of this nature isn’t enacted.

  18. In fact tax breaks are akin to that. more efficient than public works projects, more immediate too. If we are going to have fiscal stimulus – it’s as good a way as any.

    But- but- that implies that any old civilian can make decisions just as effectively as a government bureaucrat. And that just cannot be right. Can it?

  19. Hmm. Two good Chapman articles in a row. Maybe the Friday funnies will be funny this week.

  20. “Whoa, I’m not aware that there are any economists of note that don’t think monetary policy has a role in fighting the recession”

    Always amusing to browse Reason… Is this really so hard to understand???

    The Fed funds rate is 0.03%. Monetary policy is at the limit. Done. Kaput.

    Most economists do agree that monetary policy is the preferred recession fighter – until the Fed hits the zero percent barrier. Thereafter, only ideologically blinkered economists (e.g. Libertarians) continue to push for more monetary policy. Monetary policy is the sand in which they stick their heads in order to avoid considering other measures, such as Keynesian demand side stimulus.

  21. Monetary policy is the sand in which they stick their heads in order to avoid considering other measures, such as Keynesian demand side stimulus.

    I’m not sure what you mean by that. If the government is printing money to invest blow on “shovel-ready” bullshit, how is that not (bad) monetary policy?

  22. domo,

    You’re confusing the Dems’ rhetorical constituency (the common people) with their real constituency (union bosses and others who direct large sums into Dem coffers). An easy mistake to make, so I forgive you.

  23. “Gil, a giveaway of a fixed amount – when taxes are based on a %age of income – is a highly progressive a redistributionist policy. fits their objectives juuuust fine. Ill be shocked if something of this nature isn’t enacted.”

    That is true.

    The kind of tax break I was thinking about was across the board rate cuts for everybody.

    That allows the people who earned the money in the first place to keep more of it and it does not disincentivize work and productivity.

    Ultimately productivity growth is the source of all increasing economic prosperity and deliberate redistribution policies inhibits that because it takes from the higher level earners (and producers) to subsidize lower level earners (and producers).

  24. Ruster,

    “The Fed funds rate is 0.03%. Monetary policy is at the limit. Done. Kaput.”

    You would be right if the only tool of monetary policy was manipulation of overnight interest rates. Since that is clearly not the case, you aren’t. For starters, check out the following. Consider it my gift to you in lieu of tuition for an econ 201 class.

  25. I thought the role of monetary policy was to raise the interest rates, so as to kill off weak economic entities so that the strong may survive. Sort of like maggot therapy.

  26. Gil,

    “Ultimately productivity growth is the source of all increasing economic prosperity and deliberate redistribution policies inhibits that because it takes from the higher level earners (and producers) to subsidize lower level earners (and producers).”

    You’d be right, but Obama has repealed the laws of economics. 😉

  27. Also, govt spending is preferable to tax breaks because then the Dems can force anyone receiving the money to comply with the extra regulations on those receiving federal money (affirmative action, employee benefits, etc). No such social engineering is possible if we let people spend their own money.

  28. P Brooks, Once you start blowing money on toys, you depart monetary policy, and enter fiscal policy. The distinction is usually made at the point where you can’t take the money back using electrons. Then again, if you borrow cash, and monetize the deficit – that’s moneyish, even if you blew it on a new 26 lane bypass…

  29. They intend to raise the limit on loans that mortgage giants Fannie Mae and Freddie Mac can buy from $417,000 last year to $729,750 in some markets

    “They” already did this lat year

    (They have reduced this year’smax level to $625K for high cost areas.

  30. domo-

    I have no specific academic nit to pick, but I find it mildly amusing to hear that government fiscal policy based on creating money out of thin air is somehow distinct from monetary policy. I suppose (if one were so inclined) one could get involved in a convoluted discussion about the demand for money, and the “need” for government to pick up the slack. I prefer to believe that individual actors, who are spending their own money, are better at picking economically viable investments.

  31. Some Guy,

    A bunch of money is spent on infrastructure every year actually. Indeed, private spending dwarfs public spending on infrastructure, and public spending is in the hundreds of billions.

    Jose Ortgega y Gasset,

    FYI: Your nick is misspelled.

    Yo soy yo y mi circunstancia.

    If other nations start doing appreciably better than us – and some already have been – that will eventually put pressure on the U.S. to adopt similar policies. There is something to be said for the notion of a global competitive marketplace of states.

  32. P Brooks, I wasn’t correcting you, just thought I’d provide the info. You are much more correct than the guy you were responding to.

  33. Ruster,

    Monetary policy is the sand in which they stick their heads in order to avoid considering other measures, such as Keynesian demand side stimulus.

    That really makes little sense whatsoever. The vast majority of economists have no problem with Keynesian “stimulus” efforts. Now, whether they are actually stimulative is another matter. I have yet to see any historical example of where they were, and that is likely because – as many have noted – they don’t actually create incentives for new production, that is for growth.

  34. I’m actually glad that a bunch of the money will be spent on infrastructure down the road, rather than throwing it at any blueprint they can get their hands on now.

    I suspect that it will be spent on any old blueprint they can get their hands on down the road. Hell, its federal/free money, why should the states be careful with it?

    Gil, a giveaway of a fixed amount – when taxes are based on a %age of income – is a highly progressive a redistributionist policy. fits their objectives juuuust fine. Ill be shocked if something of this nature isn’t enacted.

    And I’ll be shocked if they do, at least at any level that will make a difference. At best, they will run it through the tax system so none of the evil rich get anything.

  35. There is also the little matter of the fact that attempting to “manage” the economy is not pursuant to any ennumerated power delegated to the federal government in the text of the Constitution.

    Since the 10th Amendment requires the federal government to confine itself to those ennumerated powers, the federal government is violating the Constitution by attempting to manage the economy.

  36. monetary policy is a specifically enumerated power. Article 1 section 8: “coin money … regulate the value thereof”

  37. and don’t give me the gold/silver nonsense. Coin Shmoin.

  38. “monetary policy is a specifically enumerated power. Article 1 section 8: “coin money … regulate the value thereof”

    Regulate the value thereof to maintain the dollar as a stable store of value – not fire up the printing presses to goose the economy.

  39. where is stable store of value mentioned? And anyway, the point of monetary policy is to do exactly that.

  40. By not adopting the good bad-bank solution, the system remains as corrupted as before. The bad assets will continue to suck resources out of the economic system in the form of zombie borrowers, misallocation and mispricing of capital, public sector debt, and budget deficits.

    -WSJ

    Good piece.

  41. “And anyway, the point of monetary policy is to do exactly that.”

    Tell it to Greenspan and Bernanke.

  42. We’ve had the least inflation in American history under those two – so yeah…

  43. SIV nailed me on a technicality – revise to say in American fiat currency history.

  44. but I’ll point out that deflation isn’t better than zero inflation. no matter how much the gold bugs loves it…

  45. “We’ve had the least inflation in American history under those two – so yeah…”

    Greenspan’s goosing of the money supply in an attempt to manage the economy out of the dot-com market crash was directly responsible for creating the asset bubble in real estate that is at the heart of the current fiscal crisis.

    I’d say increases in importation of cheap goods from China had a lot more to do with restraining inflation than any monetary tuning by Greenspan.

  46. maybe, but then we had a strong dollar to purchase those goods. Are you arguing monetary policy doesn’t affect inflation? Cuz Uncle Milty is gonna be PISSED…

  47. “Scooby, why not indeed. In fact tax breaks are akin to that. more efficient than public works projects, more immediate too. If we are going to have fiscal stimulus – it’s as good a way as any.”
    They’re worried that the small-minded savers would use the money for savings or to pay off debt, which wouldn’t stimulate the economy. I tend to be agains short-term tax cuts because they do no good if the rates will go back up in the future with the only long-term change being an increase in debt.

  48. “If other nations start doing appreciably better than us – and some already have been – that will eventually put pressure on the U.S. to adopt similar policies.”
    I figured that we could just say they were exploiting us, and then conquer their territory and demand half of their national income as tribute every year.

  49. Keynesians I’ve noticed really are hitting the FDR nostalgia crack-pipe as of late, comparing this situation to the Great Depression. But its totally a mis-match.

    Keynes-schemes can be made to at least appear to work so long as the balance sheet you intend to tear up and inflate was in good shape to begin with. FDR lucked out there, inheriting the amazingly strong American balance sheet vis-a-vis the rest of the world in 1933. Everyone owed Uncle Sam a lot of coin for their foolish wars (sound familiar?), and the United States in real economic output was pretty much the rest the industrialized world combined in the early 30’s. Plus, since money was backed by tangible assets, FDR could technically steal everyone’s money by executive order and then fire up the Xerox on a currency that was still quite the virgin when it came to debasement-as-policy. There was no vanguard of fixed-income generational-Ponzi entitlement disasters looming over everything either, threatening to end the party early.

    The Keynes-crowd got everything they wanted since then, too. Fiat currency? Check. Calling government debts “assets” in its own books? Check. Endless metrics of every kind to asses “aggregate demand,” in near real-time? Check. The elimination through coercion and criminalization of every competing form of economic exchange that could dilute top-down monetary-policy? Check. Things should be just peachy right now, those schmucks got every thing on their wish-list they felt they needed to “perfect” the economic cycle for all of us little people.

    But this mess is out of gas. You can’t Keynes-up an already bad balance sheet, and that is the USA right now. We are the world’s biggest debtor. Our currency has no tangible value beyond our sullied reputation as a nation, and has embarked on a non-linear inflation curve since 1972. Debasement is now policy, and has been really for some time. Income for the Government hasn’t really changed drastically (excepting WWII) as a percentage of GDP since the 1930’s, really. However the Government’s discretionary slice of that pie has shrunk dramatically. By the time you lop off servicing debts and the now very entrenched Entitlement Disaster payments, the government has discretionary authority over less than half the tax income it takes in every year. It skimns its own employees’ pension and doesn’t call it debt on its own books! Plus, we can’t even finance our public debts internally, which means we don’t control our own financial destiny as a sovereign state. We have no parachute, and have now fallen below the cloud-deck and the ground is visible – you can see the smack coming now – and I’ve got a basic idea of when that smack-down happens:

    At some point in the near future, the United States Government will be unable to borrow as much money as it will pay out servicing the debt on the open market. Once that happens, Xerox is all the Keynesians have left, but they’ve blowing that ammo already. Once its no longer “profitable” in the short-term for politicians to borrow…tits-up real fast. The rest of the world will be hanging out behind closed doors contemplating whether or not the United States is “too big to fail” at that point.

  50. The way out of this hole just has to be down here somewhere. Surely it’s just a little further. Let’s keep digging…

    I know what’s wrong. We’re not using a big enough shovel. Better call in the back backhoe. We’ll get to the bottom of this hole in no time…

  51. How else am I supposed to get my pony if Obama can’t print more money to pay for it? You guys are just mean and short sighted.

  52. But it’s worth remembering where our problems began: with an oversupply of housing. Channeling more funds into the residential sector will encourage more home building, which will worsen the glut, which will push prices down even further and generate more foreclosures, which will deepen the recession.

    Wow…just wow…

    How does an oversupply of housing cause a housing price bubble?

    Seriously how stupid do you have to be?

    Housing prices went up because we had an over supply of money (read government intervention to supply that money) chasing a small supply of houses.

    A smart person would call that Inflation.

    Cheap money given out by the government for housing will raise the cost of housing.

  53. “We spent too much, borrowed with abandon, and acted like the bills would never come due.”

    Um, pardon me, but who exactly do you mean by “we”?

    I didn’t do any of those things — I lived well within my means, kept my debt to a minimum and paid my bills on time.

    Yet my job is in jeopardy and my investments are in the tank just like everyone else’s.

    What exactly did I do to deserve this?

  54. Steve, even though you are from Chicago and should know better, you supported Obama over the Republicans in the 2008 election. You have no right to complain about Obama’s policies. I realize the media is in dire financial straits, and that electing Obama made a good story for them that sold newspapers. Now that you media got Obama in, don’t try and complain to sell more papers.

  55. The point of the stimulus package is political cover, nothing more, nothing less. Not even the Dems can think that, with most of the money being spent years down the line, it will make any difference to the economy during the relevant period. They do understand, however, how bad the political fallout would be if they were seen to be doing nothing so what can they do but promise to spend borrowed money and tell us this is the solution.
    As usual the real fault lies with the public. If we were not so desperate to believe that someone, anyone, KNOWS what to do to get us out of the fix, then the politicos would not feel so compelled to take action. The real solution is to educate the public about how the spending will ultimately make a bad situation worse and that we all collectively have to take our lumps for living beyond our means over the last 20 years and clean up the debt overhang.
    This is probably a fruitless endeavor until the folly of borrowing to solve a debt problem becomes so plain that everybody understands the real issue. We can only hope that a market economy survives the deep pain that is coming.

  56. Given your willingness to embrace that particular form of government theft known as inflation, Chapman, I don’t see why you would object to additional spending. Confiscation and destruction of wealth is the result of both — and the moral objection to each is the same.

  57. I’m not sure how libertarian economic ideas have any relevance… even if they are sound.

    Sound economics, “libertarian” or not, is having its revenge as we speak.

  58. Housing prices went up because we had an over supply of money (read government intervention to supply that money) chasing a small supply of houses.

    And the false demand signal thereby created resulted in a flood of capital going into building, in pursuit of the fat profit margins those high prices promised.

    That’s how “overproduction” happens: investment in pursuit of meeting false (inflation-driven) demand.

  59. Read the stimulus package (check out readthestimulus.org). It’s all about taking state and local projects that were previously shelved, probably because they were bad ideas proposed behind closed doors by special interest, and funding them. The whole thing stinks of fraud and waste.

  60. but I’ll point out that deflation isn’t better than zero inflation

    From a purely monetary standpoint, isn’t deflation already upon us?

  61. We’ve run out of bullets in the monetary policy arsenal. The ONLY option is fiscal stimulus. The danger is to do too little. This is not the time to worry about deficits. This is lesson number one of the Great Depression. Leaders saw it coming and did nothing to stop it. The money supply shrunk by 1/3 and most business was conducted with cash. You can rally against stimulus, but you are cutting off your nose to spite your face. It will be your job next.

  62. @domo,

    Wow, I thought that thanks to google, the latin thing was no longer a problem…. guess I was wrong, some people are ignorant And lazy…

  63. Haden,
    You’re very wrong about the monetary policy arsenal… it’s just that they’re wusses, otherwise they’d bring out the negative rates nukes…

  64. The Financial Crisis: Causes and Possible Cures

    January 29, 2009 at 6pm
    Location: National Building Museum
    Street: 401 F St NW
    City/Town: Washington, DC

    Public Talk by John Allison, Chairman of the BB&T Corporation sponsored by the Ayn Rand Center for Individual Rights.

    The media, politicians, and even many businessmen have blamed today’s financial meltdown on capitalism. But in this talk, John Allison-the longest-tenured CEO of a top-25 financial services company-will argue that this crisis is a legacy of the government’s anti-capitalist policies.

    Mr. Allison will use his unique inside view of the financial services industry to show how massive government intervention into the U.S. economy-from the creation of the Federal Reserve in 1913 to a reckless crusade encouraging home-ownership-laid the groundwork for an unsustainable real estate boom. And he will show how the government’s response to the inevitable bust-a frenzied series of bailouts, nationalizations, and “stimulus” efforts-is only making things worse.

    Finally, Mr. Allison will explain the underlying philosophical reasons for the crisis, and discuss the immediate and long-term solutions. He will show that capitalism, far from being the cause of today’s crisis, is its only cure.

  65. “We spent too much, borrowed with abandon, and acted like the bills would never come due. So what’s the prescription for getting out? Spending more, borrowing more, and acting like the bills will never come due.”

    We’re now in the midst of an experiment in doing it the other way. Consumer confidence is near zero and few among us are doing any spending at all. The results are easy to see.

    No one’s buying any electronics, so Circuit City closes its doors. That leaves hundreds of shopping centers with a hole where an anchor used to be. And all the employees that got laid off aren’t buying anything from anyone else. And the investors in that shopping center, well…

    Our entire economy is based on consumption. In economic terms, without demand there is no need for supply. So all businesses involving selling either goods or services can now shut down at will.. throwing the rest of us out of work.

    The cure? Investing in more investments, maybe. But in the absence of demand, what sort of investments could those possibly be? All the investments currently being held haven’t kept the wolf from our door. Will more energetic juggling within the financial sphere really make a difference?

    Jobs. Jobs make a difference. They give people without enough money more money to keep up with their payments. We need to stanch the flow of job loss to get cash registers ringing again. Then all the investors can get a dividend from that old fashioned approach, profits.

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