An interesting piece by the rightwing economist with a face like a
Basset hound who is in all the TV commercials and b-movies.
NY Times Business Section, November 23, 2008
Everybody's Business
What if a Slowdown Is a Never-Ending Story?
By BEN STEIN
I AM endlessly charmed by chatter about when this slowdown/recession
will end. Will it be late 2009? Maybe early 2010? Just a few days
ago, a man stopped me at a party and asked: "Are we in the fifth
inning? The fourth inning?"
I am charmed by these comments and questions because they assume a
fact not in evidence: that the slowdown/correction/recession will end
within a short time or even within a measurable time.
But this does not look like a typical recession. A typical recession
is brought on by Federal Reserve tightening in the face of excessive
demand and rising prices. The economy still functions normally, but
purposeful credit tightening slows activity. When the Fed loosens up
and money starts flowing, demand increases and growth returns. This,
at least, is the pattern of the large recessions we have had since
the Great Depression, which was a special case, as we shall see.
Smaller recessions have been brought on simply by the
inventory-business cycle, but they, too, were amenable to Fed stimulus.
That was because normal credit mechanisms were working.
This time it's different. Or, because that is a dangerous phrase, let
me say that maybe this time it's different.
The problem now, as in 1929 to 1940, is that the economy is not
functioning normally. It is shot through and through with fear, even
terror. Worse yet, and unlike the situation in the Depression,
government miscues have been only a part of the problem. This fear is
so pervasive that it has brought the credit sector to a virtual
shutdown, even to borrowers with good credit. At this point, the
lending sector is so panicked largely from the government's
inconsistent behavior and failure to rescue Lehman Brothers that it
is frozen. Not totally, but way too much for ease of lending and
maybe even for the survival of a robust economy. And if a colossal
worldwide deleveraging spreads to Treasury debt owned by foreigners,
the situation will be deadly serious.
The unemployment rate is rising. Housing is in collapse.
Manufacturing is weak. The unionized auto sector is dying before our
eyes. Commodities are falling hard and fast.
In this situation, the nation faces a real peril: we could reach a
state of long-term equilibrium as economists say well below full
employment. This condition had been thought by classical economists
to be impossible to reach. But the Depression taught us that if there
is enough fear in the economy, lenders will not lend and economic
activity will continue indefinitely at a level consistent with
serious recession or even depression.
This was John Maynard Keynes's great contribution to economic
understanding, and it's a big one. Of course, it is contested, as all
macroeconomics is, and it may not be the full explanation, but we
know from observation that an industrial economy can run well below
capacity for a long time.
We should be terrified by this prospect. It would mean real suffering
for tens of millions of people in America maybe billions worldwide.
In this situation, where fear rules, we must turn to the federal
government for relief. The private sector is the patient, not the
doctor. Solvency guarantees for banks that lend are a must. No more
Lehmans can be allowed to happen. A truly serious stimulus package is
very much in order. It has to be big enough and last long enough that
Americans do not just sock it away under the mattress. We cannot
nickel-and-dime our way out of this. The inflation threat is small in
an economy in full credit-collapse mode. There is virtually no dose
of stimulus that is too much in an economy as shellshocked as today's.
Closely related is the question of the Big Three automakers. To let
them fail or go through bankruptcy would be a mistake horrifyingly
similar to allowing Lehman to fail, and in some ways worse. It would
kick the economy to the curb, increase the dose of fear running
through the nation's bloodstream, frighten consumers from buying,
choke lending, and tend to keep the economy from returning to full employment.
I understand well the arguments against rescuing Detroit, as I have
often said. But I also understand that if you have a wayward child
who's hit by a falling tree, you don't stop to lecture her about her
wayward ways. You get her to the hospital right away.
Once we have a Treasury secretary who gets this, once we enact a
stimulus package that is big enough and long-lasting enough to do the
job, perhaps with Treasury rebates for buying cars, trucks,
refrigerators and toasters, we can be strict with Detroit. But to add
hundreds of thousands of workers from the auto sector to the jobless
ranks would be suicidal during these times.
We must remember that economies don't always revive automatically.
And the credit crisis, the deleveraging crisis and the Treasury
gaffes are more than enough to keep the economy weak. To add to the
patient's woes by allowing a vital organ to fail in this case, the
auto industry is just plain foolish.
This whole thing is not guaranteed to end in smiles. But we can stop
pretending that it will get better no matter what mistakes we make in
policy. Saving the automakers is a step out of the darkness. Or, I
might say, allowing them to die is a step toward a terrifying dusk.
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