Is the Bailout Necessary?
A friend emailed me recently (thanks WSM!):
The HUGE amount of money being spent from Obama and Bush bailouts is positively stunning, do you think economy will recover quickly and to an extent that will generate enough tax revenue and for loans to be repaid quickly? I keep hearing commentary and it seems an almost even split on whether we are spending our selves into financial oblivion or fixing our problems. What do you think is going to happen ?
I replied:
The bailout is necessary, but is another problem to solve. The great depression lasted a decade from 1929 to the early 40s and in the end was only alleviated by the ramp up in spending to go to war. War is a really terrible way to solve a economic crisis of course. As a side note, you can make a very good argument that Hitler would have never gained power if Germany and Europe wasn’t a disaster area economically. Lack of money drives people to do bad things and creates social upheaval and chaos.
More recently Japan had their “lost decade”, also caused by a price bubble. So this sort of thing can last well over 10 years if it is not addressed well. The stimulus has some technical problems, but is a good attempt at addressing the real problem. A decade of lost opportunity, poor health care, poor education, and shortages all around is enough to cause major problems for a generation of people. And that’s the least of the problems (see Hitler above).
The real problem is the GDP (gross domestic product - the sum of the economic production of the country plus exports minus imports) has a shortfall caused by this crisis. That shortfall is from the money “evaporating” as a result of the loss of value. The stimulus is intended to fill that hole and thus “stimulate” the economy. It is partly too late already, but better late than not have it at all. Unemployment is high now, and will get higher. It is a more useful indicator that the stock market. The stock market is a fickle indicator, it is more tuned to Wall St than Main St. Its daily ups and downs are not that important, but its longer term trend is a forecasting indicator. However it is hard to tell the difference between the trend and the various short-term ups and downs.
The problem with the stimulus spending is that we need to either borrow the money or simply print it. Both create problems. If we borrow it we have to borrow it from those that have it: China, the Middle East, etc. We also have to pay it back. Borrowing that much can make those borrowers nervous. Some of China’s recent statements show that they’re not happy loaning that much. If we print it then we cause inflation later. That has its own distorting effect on the economy as in the 1970’s and 80’s. Inflation discourages saving and encourages borrowing.
But if we don’t do the stimulus, the economic problems we see now are trivial compared to what will happen. Right now we have 8.5% official unemployment rate. In the 30’s it was as high as 25% officially. (Unofficially we have around a 15% rate with people who are either underemployed or have just stopped looking.) It’s bad now, but most people are not going hungry. That will change if we don’t fix the problems.
Some people, like Newt Gingrich, just want to “let the markets work” and companies fail. That’s one solution, but not the best one. Besides, this idea is based on the notion of free markets. As I’ve written before there are very few actual free markets in the economic sense. Market corrections work by people losing money, losing their jobs, and perhaps losing their futures. The can also result in price gouging and personal suffering. Market corrections like that are unfeeling. They also sweep up things that wouldn’t otherwise be affected; healthy companies that just can’t get working credit anymore, or bankrupt cities and towns that can’t afford basic services.
It’s funny that the politicians I’m seeing complaining and wringing their hands over the size of this stimulus are the same ones that are willing to go massively into debt to fund an endless war, lower taxes on the rich, and also to reduce regulation so let companies get away with creating this mess. Now, with Obama in office wanting to spend money on infrastruction and to help non-rich regular Americans these same people object.
So yeah. I think we need the stimulus, but I sorely regret that we need it as it will cause other (fortunately smaller) problems. When Bush came into office, the annual budget debt that the government had since 1863 was zero (although we still had an accumulated long-term deficit to pay off). Bush squandered the surplus he inherited by giving it to the rich and starting an unnecessary war in Iraq.