Thursday, October 09, 2008

Economic Hypochondria

Truth be told, I don’t like when the economy is the news. You tell someone you’re an economist in days like these and ears perk up, and then I am immediately on the hook for saying something that seems to make sense. The fear of being found out! It’s downright primal. A proctologist never has this problem. “What do you do?” “I’m a proctologist.” End of conversation.

So it’s like you feel a responsibility to follow the ins and outs of the financial crisis so you can stay abreast. But again – where’s the money in that? But let me give you a slightly different take on the bailout, which admittedly is probably very ignorant or at least non-informative from an economic perspective.

In law, there is a concept, the name of which I forget, which makes the following free trade completely illegal: if one person is in extreme duress and can be relieved at little cost to another, than the person who can provide the relief cannot charge an exorbitant fee. For example, if a rich man is in a boat that will surely capsize in a storm, and his only hope for living is to dock the boat on the private property of another man until the storm passes, the owner of that property cannot size him up and require that he pay $1 million for the privilege of docking the boat on his property.

I say it is illegal, but in fact there is one entity that is allowed to do it at its leisure – Congress. So if your economic boat is in trouble, and you go to Congress for the fix, get ready to subsidize wooden arrow manufacturers. I cringe whenever there is a stimulus package – kick each taxpayer $600 and then kick millions at a swath to pork that lines the pockets of a few players. If there is one aspect of economic policymaking that has a shot at working, it’s monetary policy, because it’s more or less controlled by the Fed, not Congress, nobody understands anyway, and more importantly no one thinks they understand it. Arguably this entire crisis stems from our government trying to push home ownership onto people who couldn’t afford it, and it is mostly the banks holding the bill.

Knowing this, and again without looking into the legitimate economic aspects of the current aid project, when I take a step back it is pretty scary. In defense of the aid package, with respect to these banks failing, there is at least a problem. But forget about the banking crisis for a second – when it was thought to be much more limited than it in fact was, the drumbeat has been that this economy is horrible, yada yada yada. There is this perception that the economy is “headed in the wrong direction.” From 2000-2007, real GDP grew at 2.5 percent annually. That makes us approximately 22 percent richer than we were 8 years ago; another 8 years of that and we’ll be 50 percent richer. If up is considered the wrong direction, what is the alternative?

It’s one thing to say that the cure is often worse than the disease, which is a maxim that often applies to government action. But it is worse than that now because there is not that much of a disease in the first place. And so we head into this election like a hypochondriac about to choose a doctor. And the doctor we are leaning toward is our mother who has Manchausen Syndrome by Proxy. “Mom, I think I have a slight cold.” “Son, you don’t have a cold, your body is ravaged by cancer and your best hope is to get a few transplants of major organs – heart, lungs, liver, etc.” And so we have a guy who will probably dust off Smoot Hawley (perhaps the most disastrous piece of economic legislation ever passed in the US back in the Depression), increase the tax burden for investments, ramp up the regulation of a key industry that got into trouble in the first place due to the government pushing it to act against its shareholder’s interest, and coast us away from this harmful ideology of free market capitalism that somehow by accident increased our standard of living by a factor of 14 since 1926.

The banking crisis will pass. The government crisis may not.


Anonymous Jim said...

So is this whole thing a case of "But I don't WANT to go out of business. Isn't there a congressman or senator I can sucker into making the government bail me out?" on the part of the banking/financial sector? Why don't we let them fail? That's free-market captialism, right?

11:35 AM  

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