Panicking in the sunlight

After reading the details of the stimulus bill in the United States, the federal deficit in Canada and the upcoming deficits in Quebec and other provinces, I began to wonder why I was the only one to see this as absolutely normal. After all I had grown like anybody familiar with economics and public choice theory to think that economic irrationality is highly reasonable in political markets. A nice way to summarize this is a saying from a former teacher of mine who used to say that governments always have crazy solutions ready that are only waiting for problems. So governments multiply bailouts and rescue plans which dwarf the spending levels of World War II, the New Deal, the War in Iraq and many more. They already had the solution and a relatively small crisis provided the problem that politicians were looking for. 

Is there really such a problem? It seems that after years of sustained growth, we have forgotten that recessions are part of the business cycle and of the self-correcting mechanisms of the economy. On top of this, if you look at the data from the National Bureau of Economic Research in the United States, you can see that recessions have declined in duration and degree(even this one seems mild by certain standards)  while expansion periods have lengthened and strengthened. Unemployment levels in Canada or the United States are no way near the 1981 levels to which everyone wants to make comparison and even job losses as a percentage of the labor force is equal to 1981 recession at 2.2%. To add to this, inflation is no way near the levels seen in other recessions since World War II. As to the situation of banks, American economist Mark Perry took the data from the Federal Deposit Insurance Corporation (FDIC) and from it, we can see that now we are no way near the number of problems banks as we had during the 1990 recession even though there are more than in the 2001 one. Sure, the situation is not rosy but all the fear mongering is pure non-sense from doomsday apologists or industrial fat cats seeking corporate welfare. 

Economic history also sheds light on what must not be done to “rescue” the economy; fiscal stimulus, bailing out industries, subsidizing left and right are amongst those. It also teaches us that the idea that even the smartest genius on Earth, much less parliament and congress, cannot conceive the solution to “save” the economy. Nobody possesses that knowledge and it is better to let things unfold without interference. A nice example has been provided by Murray Rothbard who analyzed the 1819-21 recessions in the United States to conclude that the absolute lack of government intervention (because bad legislation failed to pass) made the panic end quickly and peacefully. In contrast, the Great depression was, in the opinion of Lee Ohanian and Harold Cole, lengthened by seven years because of the New Deal.  

The evidence is there, lying under the sun light for everyone to see except the government of course. So governments are panicking in the sunlight, they resort to fear mongering by saying that this is an “unprecedented crisis”. Even economist Christina Romer (now that she is in government) is doing the contrary of what she said in her own research on fiscal stimulus. They seem to be trying to block the sun like Montgomery Burns in that Simpson episode. This way, they obscure the facts from history and then they can say that they have the solution and they, unlike other political parties, are getting things done. In that sense, it is rational for them to panic and to propose already tested-and-failed solutions under new branding. 

When you are in the dark and you can’t see where the hell you’re going, that qualifies as a good situation to panic but panicking in the sunlight and trying to block the sun qualifies as political rationality.