The winter of stupid economics

As the global mental meltdown continues, the wisdom of decades has disappeared in weeks. We are left poorer for it. Take deficits... please. How long did it take us to learn, or say we'd learned, that they were bad? How many politicians swore while campaigning not to run them? And now look.

From the 1960s through the early 1980s, a lot of smart people really believed deficits stimulated the economy. But we ran them and things got worse, then we got rid of them and things got better. In some ways, I realize, governments of every stripe are now running deficits because they're helpless before the dynamics of a modern budget. But their insouciance leaves little doubt that the agonizing experiences of stagflation and runaway interest payments gave them only campaign slogans, not understanding.

What the rest of us learned over 30 years is that "government spending" does not stimulate the economy. When used for legitimate public purposes, like infrastructure or defence, it leaves us better off if done reasonably well. But whenever government spends, it spends real wealth that it must take from the private sector. That's you and me. In hard times, we're less able to bear any given burden. Hence increased government spending is especially bad in a slump.

Clearly politicians believe the opposite with instinctive rather than reasoned passion. Consider this brief story from Monday's Citizen: "U.S. stock index futures slipped, while the dollar and the yen rose yesterday, after world leaders pledged rapid action to combat the financial crisis, but fell short of announcing concrete measures or major regulatory breakthroughs."

In short, politicians announced yet again that they will definitely spend huge sums of money they don't have on things they don't want for reasons they can't specify in ways they haven't figured out. Oddly, confidence wasn't restored.

When they give details, things get worse. Last Tuesday, U.S. Treasury Secretary Henry M. Paulson Jr. announced that the $700 billion "rescue" plan approved by Congress would not, as originally declared, focus on buying bad mortgage debt, but would instead involve purchasing bank shares. But he didn't know if the government would also throw more billions at failing car companies on top of the $25 billion loan program they bagged in September. Or give money to other financial institutions as well. Or also buy bad mortgage debt after all. "Mr Paulson's comments", the BBC observed tartly, "did little to ease continuing investor jitters..." The next day, Mr. Paulson mused about $50 billion maybe going to companies that issue credit cards and make car and student loans. Or not.

As Terence Corcoran wrote in last Thursday's National Post, when governments are in full panic mode, determined to hurl very many billions of dollars in some direction but can't figure out which and keep changing their story, any sane person will get or stay out of the markets until they figure out where the harm, or good, is going to be done. But there's more.

In the 1980s and 1990s, it became a familiar critique of government industrial strategy that the state couldn't tell who the winners were and the market didn't need to be told. And the policy elite all learned to mouth the words that "picking winners and losers" was a bad idea. But evidently they never believed or understood it. All these bailout plans seem to involve giving money to companies governments have identified as key to economic vitality on the basis that they're about to go bust. So politicians are cluelessly unteachable here too. And they have our wallets.

The Globe and Mail recently editorialized that "While there are ample reasons for Ottawa to tell car makers they don't deserve taxpayer bailouts, there are also compelling reasons to provide help for weathering the current storm. The trick will be to provide the right help to keep these critical companies afloat without getting stuck in a corporate welfare quagmire." Strangely, this argument drops any pretence that GM, Ford and Chrysler are winners but urges backing them anyway, which is hard to portray as an intellectual advance on older ill-advised industrial strategies. Especially as no one has a word to say about why policies that were universally deplored as unaffordable folly in booms have become reputable wisdom in hard times. Instead this week's Throne Speech blithely promised "further support" for the "manufacturing sector, particularly the automotive and aerospace industries."

Maybe I should simply be happy no one's yet suggesting we rekindle inflation and see if it helps. But I'm not, because it's going to be a long, dumb winter. And just months ago we were all so smart.

[First published in the Ottawa Citizen]

Columns, EconomicsJohn Robson