The Unstimulating Stimulus Bill

Speaking on January 9, Barack Obama said that there was “no disagreement” that the federal government needed to act to get the economy moving.

But last week, Cato Institute took out a newspaper ad signed by several hundred economists who said that they disagreed with his “stimulus” approach.

One of them was Duke University’s Michael Munger. I recently posed several questions to him regarding his thoughts on the “stimulus” package and how well most Americans understand economics. Below are his responses to my questions:

Leef: You signed the Cato Institute’s ad that takes issue with President Obama’s assertion that everyone agrees that the federal government needs to spend much more money to help the economy out of recession. Why don’t you go along with his idea of stimulating the economy through increased federal spending?

Munger: I am willing to give the President the benefit of the doubt. He probably actually believes that there is a consensus. But there isn’t — not even close!

There are two problems here. The first is the problem of what Nobel Prize winning economist Milton Friedman called “long and variable lags.” It’s like steering a huge ship with an old rubber band for a steering cable. The cable stretches and gets hung up, and so you may turn the wheel really far in one direction…..AND NOTHING HAPPENS. So you turn some more, and some more. And then finally the ship starts to turn. When it finally reaches the heading you want, you straighten the wheel.

BUT THE BOAT KEEPS TURNING! Long after you have straightened the wheel, the previous turn keeps affecting the boat’s direction. So, we are going to see nothing for a long time, and then when the economy does start to recover we are going to see a sharp burst of inflation. As we have seen in the past, most recently in the early 1980s, inflation is expensive to cure and hard to combat. I just don’t think we know enough to steer the ship.

Second, even if you think we CAN steer the ship with fiscal stimulus (I disagree, but suppose), then most of the projects and spending being packed into this bill are NOT STIMULUS. “Shovel ready” projects have already gone through three years or more of NEPA review, and planning. The money is already allocated.

And the social spending, on pet projects like contraception planning and health care….those may be good projects, on the merits (though, again, I think they are not). But the point is that there is NO STIMULUS in this bill, or in the Congressional plan.

Leef: Is it your view that the “stimulus” package just won’t work very well, or that it will actually make matters worse?

Munger: Both. It won’t work in the sense that it will provide no stimulus. And it will do harm in the sense that we are all grabbing our children by the ankles, and shaking them upside down to get the change out of their pockets. Our children will be paying for this mistake, in terms of the increased deficit and consequent reduced discretionary budget, for the rest of their lives.

Leef: President Obama and his circle of advisers are all well-educated people, yet they support economic policies that seem to be deeply flawed. Would you say that they simply haven’t read the right books and taken the right courses to comprehend what’s going on, or is the problem that politicians sometimes pursue objectives other than long-run prosperity for the general public?

Munger: President Obama is no worse than George Bush, and he actually may be quite a bit better. George Bush is the one who ran the huge deficits, and who allowed enormous discretionary spending increases and increases in domestic regulation.

The problem is this: It’s hard to claim credit for the vitality of the market. Politicians claim credit for DOING things.

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 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!

I don’t blame the President. I blame voters, who have the naïve idea that government is responsible for the economy.

Leef: If had a few minutes with President Obama to explain why the economy has gotten into so much trouble, what would you say?

Munger: I would need at least an hour, and maybe two hours. There is no one factor, though in two hours I could explain how we got here.

If I had two minutes, I’d say, “Mr. President: Do no harm. Resist the temptation to panic, and act just for the sake of appearing to act. Don’t expand the deficit any more for this pointless ‘stimulus.’ “

Leef: Most college students enthusiastically supported Barack Obama’s candidacy and apparently support his economic policies. Do you think that there is a problem of economic illiteracy among college students?

Munger: There is a problem of economic literacy among our entire population. The idea that the President, or Governor, or for that matter the Federal Reserve, “controls” the economy would be funny if it weren’t so serious. We really are just like doctors in the 1820s, believing that “bleeding” releases poisons from the body, when in fact bleeding makes the problems worse, not better.

Leef: Suppose that after a class, a group of students came up to you and said, “The economic turmoil has us quite worried about the future. We’d like to know what the government should do, not only to get past the current recession, but to keep future bubbles and recessions from happening.” What would you say to them?

Munger: The simple answer is to let markets do their work of pricing assets. The use of federal power to filter packages of mortgage-backed securities through Freddy Mac and Fanny Mae was one of the primary causes of the recession.

But I would also say that economic booms and recessions are facts of life in capitalism. (Not in a socialist system. Under socialism you have one permanent recession. But without any growth, ever, maybe you don’t notice the lack of growth!). The government must never give citizens the impression that they are insulated from risk. Personal anticipation of risk, and choosing an investment portfolio to limit risk, are key private responsibilities of every citizen. The government can’t do it for you.

Leef: Would you suggest the three best books for someone – President Obama, Governor Perdue, a soccer mom, a college student, Joe the Plumber or anyone else – to read for a good start on understanding economics.

Todd Buchholz, New Ideas from Dead Economists
Paul Heyne, The Economic Way of Thinking
Burton Malkiel, A Random Walk Down Wall Street

And, the SINGLE best, ONE thing to read is: Leonard Read’s essay “I, Pencil.”

Leef: Thank you very much, Professor Munger!