JANUARY 9, 2009

Bush Redux. In September I wrote about the Paulson plan. While I opposed it, I did so on grounds there was no affirmative evidence that such an action (of buying mortgages) would cause any benefit. It just established a bad precedent of excessive Government interference in the private economy. Of course, they never did buy mortgages, but that is old news. But I also, naively I now believe, thought that maybe just any action at all could bring back "confidence" in the economy. If anything, the evidence is more consistent with the Paulson-Bush bailout causing a decrease in confidence. Now it is January 2009 and for me it is deja vu all over again. In David Brooks article in the NY Times today Brooks: Confidence Surplus he amazingly points to a study by Obama's own newly appointed head of the Council of Economic Advisors, Christine Romer, where she shows there is no evidence at all and never has been that "fiscal stimulus" can help an economy out of a recession. Romer's study states:

“Our central conclusion is that monetary policy alone is a sufficiently powerful and flexible tool to end recessions,” they wrote. Automatic spending policies like unemployment insurance have sometimes helped. Discretionary policies, like tax cuts and stimulus plans, have not been of much use. As they put it: “Discretionary fiscal policy, in contrast, does not appear to have had an important role in generating recoveries.”

So, clearly, the central political question of the day must be, "why is Obama proposing the single largest borrowing and money printing plan (as a percent of our total economy and of course in absolute terms) in the history of American peace time politics"? Brooks defaults to my hope back in September. While no economic breakthroughs regarding stimulus spending have been made since Romer's study, Obama will nevertheless move forward with his trillion dollar borrow and spend program. In the most literal way this is a "confidence game". But if it is all about "confidence", how can you create confidence if people know what you are proposing has no reason to work? Brooks has it right. The Obama gamble is he can release those Keynesian ghosts through sheer bravado. If he can pull it off, that is good. But if he can pull it off with confidence brimming, why borrow $1 trillion to rebuild "crumbling roads" and "make federal buildings more energy efficient"? One reason is his advisors and most economists are all in panic mode, like Paulson in September. Another reason is the time honored belief of Liberal politics that Government payoffs for favored policies (Obama spoke a lot about alternative energy in his speech yesterday) and favored constituents is a way to maintain power. Has anyone thought of the novel idea of "first, do no harm"?

(posted at 10:00 am by Mike Rulle)