Readers of this blog know that I preferred our current president over his opponent in the election. After the bailout fiasco, I would have dearly loved to have had a candidate who actually opposed the whole idea. McCain bleated about socialism, but I honestly don’t believe he could have identified a capitalist or a socialist with a detailed checklist.
All that has now passed us by. Given the candidates we nominated, it was pretty much a foregone conclusion that we would have some kind of stimulus package and that the ideas behind it would be a bit murky, no matter who was elected. And I’m not 100% opposed to stimulus as a basic concept. I just don’t think the arguments for or against are being done all that well.
Now I’m not an economist by training or inclination, though I did study just a bit of political science. I’m not likely to be mistaken for one either. At the same time, as I listen to actual economists talk on TV, and sometimes even when I read their longer, and presumably better thought out pieces in print, I begin to wonder why any of them are mistaken for actual economists either.
Let’s take just one little incident–the $1.2 million renovation of a certain executive’s office. Now there’s reason to be outraged here, but it’s not any of the reasons I’m hearing. Money spent on luxuries may be wasted from the point of view of a company’s or family’s budget, but in terms of the economy it’s not wasted. We really do underestimate the difficulty of keeping a good stack of cash down–when people get to make choices on how to spend it. Even $1400 wastebaskets provide employment and keep the money moving–a much better result than holding that money as a cash reserve. Of course, $1.2 million is a tiny fraction of a percent of the problem here.
Then there are all those bonuses. People talk as though the bonuses went out with the garbage, never to be seen again. Actually, those bonuses probably did more to stimulate the economy than most of the other money provided as part of the bailout, simply because the money got out of the companies in the first place. I doubt it did very much, however.
The problem, I think, is that we’re generally forgetting that an economy is more about people than it is about money. Ex-Senator Phil Gramm was pilloried during the campaign for saying that the recession was a psychological recession, but in fact recessions generally have a huge psychological element. In fact, the entire economy has a huge psychological element. If President Obama’s approval ratings remain high, he could have more stimulus effect by giving speeches than the actual spending of money has. I say that not to emphasize the power of speech, but rather the weakness of simple pouring out of money, especially pretend money, i.e. money we pretend we have.
What we are forgetting all around, and what keeps the economists stirred up and largely wrong, is that we forget that the economy is about people. And herewith the book title: Human Action, by Ludwig von Mises. Now herewith a warning. Human Action is not a short book or an easy book. Ludwig von Mises dislikes most of the terms we commonly use, even labels of fields of study. He defines them and then figures he can use them throughout the book. My edition, the 3rd Revised Edition printed by Henry Regnery Company in 1966, runs to 907 pages including the index.
I have read all 907 of them. My political science professor at the time advised against it. He said it was hard, and that my time could be better spent. I absolutely and profoundly disagree. It was one of the best decisions of my college life.
But I believe the most important lesson for economists comes in the title of only two words: Human Action. Von Mises went so far as to name a new science, praxeology, the study of human action. I was asked by another one of my professors why one would name a book about economics “Human Action.” Once I had read the book I was able to answer: Because economics is about human action.
And that brings me back to my personal outrage over the $1.2 million office renovation, or the billions spent on bonuses by the industry. It’s not that the money was spent. It’s not that the money was spent on luxuries. It is that the money was presented to people as a reward for failure. Companies whose performance was dismal were being paid huge bonuses. A man whose company was about to fail was allowed the choice of renovating his office. That was a choice he should have gotten only as a result of being successful.
This was the problem with the bailout of the financial institutions and the bailout of the auto industry. The government decided to bailout whole industries as though industries thrive or fail. That’s not the case. People thrive or fail. Gather enough failures into an industry, and sure enough that industry will also fail. But if you push money into the industry it goes to those people, and it rewards them for failure.
Many people are shocked that we could spend $350 billion on the financial industry and see it still in a tailspin. But if you find someone who is unwise in using money, and he loses $350 billion or so, and then you give him another $350 billion, what do you expect? I still think things would go badly, but at least a sensible lender would require a change in leadership. That’s one of the advantages of bankruptcy. The business gets “bailed out” (sort of), but a judge gets to put limits on the choices of the folks who failed.
Similarly, we heard in the auto bailout that we couldn’t let the industry fail. But Ford still had cash reserves, even though its president was going to the trough with his fellow executives. Expecting them to reduce their own salaries and bonuses was a minimum sort of precaution, but did anyone ask why we should trust the same people with more money?
The basic action here is human, and if we forget that, we are unlikely to be able to solve any of the problems. Companies that are rewarded for performing poorly will continue to perform poorly. We’ll get to throw good money after bad.
The stimulus package that is going through congress right now is also being debated in the wrong terms. “How much of it is in tax cuts, and how much in spending?” we’re asked. But the problem is that we have none of the money, so the point in either case is how much money are we going to pretend to have, and where we’re going to inject our play money into the economy. Now pretending to have money is not necessarily doomed to failure, provided that you have some way of getting the actual money, or more importantly the goods and services that it represents.
So I’d ask the question of all the stimulus projects: Will this improve the economy, i.e. help improve production enough to pay for itself over the next 10 years? 20 years? 30 years? While psychology has something to do with it, optimism only goes so far before it must be fed by something that actually works. The government could stimulate the economy by building infrastructure, provided it’s good infrastructure, is needed, and is the sort of thing that government has to do.
I sincerely hope we start examining what we’re doing with a different test, looking at what will actually be accomplished. I’m afraid the Republicans in congress, while right to be skeptical, are not being skeptical of the right things, and are not proposing anything that would be substantially better.