They Were For Stimulus Before They Were Against It
Brian S. Wesbury and Robert Stein 12.01.09, 12:01 AM ET
Are economies inherently unstable? Are people driven by “animal spirits,” and therefore susceptible to wild overreactions of stupidity and greed? And is government intervention necessary to stabilize these unstable, emotional markets?
Or, do you believe that capitalism is inherently stable and that economic problems typically have their roots in government mistakes?
These are the most basic of all economic questions. The answers cut one way or the other–either you believe and act as if the government is necessary for economic stability, or you do not. Every bit of economic analysis and most political decisions about fiscal policy take one side or the other of this debate. Either you believe in classical economic principles, or you believe in Keynesian economic principles.
The Obama administration is arguing that insurance companies don’t face any competition–i.e., that free markets failed–and that that’s why we need a public health insurance option. And there are many who will claim that we need “another” government stimulus plan to help create jobs. Still others think that without government intervention, man-made global warming will cause Manhattan to be covered by water.
Typically, it is liberals who believe these things, while conservatives will often argue the opposite–for example, that insurance companies should be allowed to compete across state lines, stimulus spending doesn’t work and that global warming is scare-mongering on a massive scale.
The relatively stark dividing line between these two camps has been understood by most people. But sometimes the line drifts or becomes less obvious and confusion reigns. Last year, for example, with Treasury Secretary Henry Paulson and Fed Chairman Ben Bernanke in charge, many conservatives got so spooked about the state of the world’s financial system that they supported a government-centered and liberal response to the crisis–taking over financial institutions, threatening “overpaid” CEOs, cutting interest rates to near zero and pushing hard for the Troubled Asset Relief Program (TARP), which made up most of a $700 billion bailout fund.
While some argue that “everyone is a general after the battle”–meaning that only in hindsight can you see that TARP was a mistake–we argued loudly last year that rather than bailing out banks, mark-to-market accounting rules should be changed and government involvement should be minimized. But Treasury and Fed officials, along with many analysts and influential pundits, said that the threats to the economy were so grievous and scary that government bailouts were the “only” answer. This argument won the day, mark-to-market changes were pushed to the sidelines as a non-issue and many leading Republicans voted to pass TARP. Many of those votes came from “conservative” politicians who also supported the $150 billion Bush stimulus bill in February 2008.
Now, with the unemployment rate at 10.2%, many of those same conservatives want to make the case that Obama administration policies have caused this to happen. This is awfully confusing to the average American. Why is one set of bailouts good and necessary, but another set bad and political?
Conservatives have another problem as well. The economy is recovering. And the more conservatives argue that it can’t recover because of the “uncertainty” caused by Obama policies, the more they leave open the door for the current administration to claim that the stimulus worked. And conservatives who voted for TARP either must agree on some level that this is true, or go back and admit they made a mistake.
This should not be that hard. Stimulus did not work. TARP, TALF, PPIP, two stimulus bills, huge new government spending, Fed rate cuts–the government tried everything. But the market did not bottom, and banks raised no private capital, until mark-to-market accounting rules were corrected in March and April of 2009.
Don’t take this in the wrong way. We are classical economists; we believe Keynes was wrong. We think government caused the bubble to begin with, and then made it worse by overreacting and panicking. But it’s awfully hard to support conservatives who argue against government action this year when last year many of these same people supported government bailouts. It’s inconsistent and it’s confusing.
Brian S. Wesbury is chief economist and Robert Stein senior economist at First Trust Advisors in Wheaton, Ill. They write a weekly column for Forbes. Brian S. Wesbury’s new book It’s Not As Bad As You Think: Why Capitalism Trumps Fear and the Economy Will Thrive (Wiley) was published in November.