An Economics Lesson

Matt Lewis
Posted: Feb 10, 2009 2:20 PM
Economist Mike Munger makes a compelling argument against the stimulus

Here's an excerpt:
Imagine you had a six-year-old daughter, and that she has a high fever. It’s 1820, and we don’t understand germs or fevers very well. You call the doctor, and the doctor comes to the house. “Please, do something. DO SOMETHING, and help my daughter,” you say.

The doctor takes out a lancet, and makes a small incision in your daughter’s wrist. The theory was that the fever was in the blood itself, and “bleeding” was the only treatment that people in 1820 knew.

It doesn’t work. Your daughter’s fever is still very high. So, you tell the doctor, “DO SOMETHING! You are the doctor.”

The doctor bleeds her some more. And she dies.

And the next day you blame the doctor for not bleeding her MORE and SOONER. But bleeding was the wrong thing to do.

This stimulus is the wrong thing to do. The fact that the first round didn't’t work leads me to think we need to stop! But all the desperate economic parents out there say, DO IT MORE! DO IT LONGER! DO IT FAST!
In related news, Adam Brickley sends along this update from the Club for Growth/Heritage Foundation seminar:
I really enjoyed "Market Based solutions" panel. They have three really smart guys up there who I personally think should be rewarded with a private meeting with Obama, Geithner, Pelosi, Reid, and the rest of the government big shots. I don't think they'll get it, but I can dream.

Mario Rizzo, a microeconomics professor for New York University, advocated a stimulus that creates economic value rather than destroying it. The goal of a stimulus should be to create more value in the economy, not merely doing work for the sake of doing work. The current stimulus package, he said would not merely use people and resources that are currently unemployed. Instead, it would force the redirection of resources that are creating useful products to new projects that may not be as useful. [# More #]

Rather than the current package, Rizzo wants "neutral stimulation" - spending that does not force debt and misdirection of resources. The only way he says such stimulation can be accomplished is through across-the-board tax reductions. He wants cut in capital income taxes, and thinks it might even be worthwhile to abolish the corporate income tax.

Professor Luigi Zingales of University of Chicago, urged  policy makers not to craft a cure that is worth than the disease. For example, he said that housing subsidies  helped create the problem, and strongly opposed using them as part of the supposed solution.. Instead, he wants to create an expedited way to renegotiate mortgages, thereby avoiding unnecessary foreclosures due to plummeting price. This would make a big impact and not cost taxpayers a dime.He also said the banking sector could have been helped simply by writing a special section of Chapter 11 lower the costs of bankruptcy for bank. this wouldn't bail out banks that are going under - but it  would recapitalize the banking sector overnight without spending any taxpayer money.  

The Heritage Foundations William Beach then argued that we are in a war between the failed approach taken to a recession in 1933 - the idea that government spending leads to more consumption in the economy - and the successful tax reduction strategy pursued by Reagan in 1981 - which lead to 20 years of economic growth. He said that President Obama's package represents the 1933 strategy, and that a massive tax cut plan put forward by Sen.Jim DeMint represents the 1981 paradigm. As proof of which, he ran both strategies (which would cost the U.S Treasury roughly the same amount) through an economic model. Hixs model showed the Obam plan raising Gross Domestic Product (GDP) by $72 billion per year, creating 616,000 jobs per year (many in the government sector), and causing interest rates to rise. In contrast, DeMint's tax cuts raise GDP by $267 billion per year, create 2.2 million jobs (overwhelmingly in the private sector, and cause interest rates to fall.

After listening to these guys, it seems rather clear that we can do a lot to help the economy without spending one red cent, but unfortunately I don't thin the Obama Administration is consulting them.


The seminar ended with a great luncheon speech by Professor Don Boudreaux, the chairman of the economics department ad George Mason University and a blogger for Cafe Hayek, and he gave a wonderful "back to basics" lecture on the current economic situation. 

First, he said it was "annoying" that the current recession is being repeatedly compared to the Great Depression - because there really is no comparison. The Great Depression was "great" because of it's length and depth, he asserted, and the current situation is nowhere close on either count. While the Depression dragged on for a decade, the current recession has only gone about 15 months. Likewise, unemployment during the Depression never dropped below 14%, and we are only at 7% right now. While this may be a less than stellar rate of unemployment, it has been equalled as recently as 1992 - and we clearly weren't heading for a second depression then.

He also argued that the proper response to a popped "housing bubble" is to say "good riddance" and move forward. However, the current plan to save the housing market does exactly the opposite by attempting to re-inflate the bubble.

Personally, I thought that Dr. Boudreaux provided the perfect ending to a phenomenal day.  It was a great experience, and the Heritage Foundation and Club for Growth deserve a lot of kudos for putting it together.