Wikinvest Wire

Keeping the drunk in Scotch a while longer

Sunday, December 28, 2008

In this New York Times commentary by Peter Goodman, you get a couple more metaphors for the ongoing economic crisis and the stimulative responses by government - one good, one bad - along with about as good a rationalization as you are likely to hear for why contemporary economics is unique in the world in that, to borrow a phrase from the world of medicine, the cause and the cure for an illness are one-and-the-same.

So it may seem perverse that in this new era of reckoning — with consumers finally tapped out, government coffers lean and banks paralyzed by fear — many economists have concluded that the appropriate medicine is a fresh dose of the very course that delivered the disarray: Spend without limit. Print money today, fret about the consequences tomorrow. Otherwise, invite a loss of jobs and business failures that could cripple the nation for years.
To the uninitiated, say, someone observing the Earth from afar and knowing nothing about our monetary history, it must surely seem like madness.

How can more easy money be the solution to the problems caused by too much easy money?

That question must have been asked a hundred times here over the last year.

On to the metaphors - first the good one:
“We got into this mess to a considerable extent by overborrowing,” said Martin N. Baily, a chairman of the Council of Economic Advisers under President Clinton and now a fellow at the Brookings Institution. “Now, we’re saying, ‘Well, O.K., let’s just borrow a bunch more, and that will help us get out of this mess.’ It’s like a drunk who says, ‘Give me a bottle of Scotch, and then I’ll be O.K. and I won’t have to drink anymore.’ Eventually, we have to get off this binge of borrowing.”

Some argue that the moment for sobriety is long overdue, and postponing it further only increases the ultimate costs. “Our government doesn’t have enough spare cash to bail out a lemonade stand,” declared Peter Schiff president of Euro Pacific Capital, a Connecticut-based trading house. “Our standard of living must decline to reflect years of reckless consumption and the disintegration of our industrial base. Only by swallowing this tough medicine now will our sick economy ever recover.”
Oh, there's Peter again - he's everywhere these days...

A lower standard of living is a pretty tough to sell for politicians - at least for those who are seeking another term in office, which, as I understand it, is job one for most elected officials.

That would be quite remarkable though, wouldn't it?

If, at his inauguration, Barack Obama calls for a collective acceptance of our declining standard of living as part of our new role in the global economy.

Nah. Change like that would be a bit much. 'Tis better to stick with what has always worked in the past - the bad metaphor - the economy as a sick patient rather than someone with a serious drinking problem.
But most economists cast such thinking as recklessly extreme, akin to putting an obese person on a painful diet in the name of long-term health just as they are fighting off a potentially lethal infection. In the dominant view, now is no time for austerity — not with paychecks disappearing from the economy and gyrating markets wiping out retirement savings. Not with the financial system in virtual lockdown, and much of the world in a similar state of retrenchment, shrinking demand for American goods and services.

Since the Great Depression, the conventional prescription for such times is to have the government step in and create demand by cycling its dollars through the economy, generating jobs and business opportunities. That such dollars must be borrowed is hardly ideal, adding to the long-term strains on the nation. But the immediate risks of not spending them could be grave.
Ultimately, the drunk metaphor is much more convincing, but even Mr. Baily comes around to the view that maybe more alcohol really is the best course of action:
“This is a dangerous situation,” says Mr. Baily, essentially arguing that the drunk must be kept in Scotch a while longer, lest he burn down the neighborhood in the midst of a crisis. “The risks of things actually getting worse and us going into a really severe recession are high. We need to get more money out there now.”
Yes, we really do need more money out there now.

We'll set about fixing things the next time around - after the current crisis has passed, when the drunk is back on his feet again.


Anonymous said... when do we start living with less?

Anonymous said...

It sounds like you are advocating the policies that Greenspan espoused. I'm confused.

Tim said...

Why is my sarcasm misconstrued so much lately? We never fix things next time around...

Anthony J. Alfidi said...

The danger with more Keynesian solutions is that we don't know the point at which the drunk becomes so saturated with booze that his liver seizes up and stops functioning. The liver-transplant moment is the point at which we start hyperinflating.

Anonymous said...

If the politicians can't or won't fix it when it's a we really expect them to fix it when it's not?

I have never known a drunk to swear away alcohol when their handling it just's always after the hangover/DUI arrest/car crash etc that they promise to make the hard choices.

We'll drink until we hit the hard crash...apparently we're not there yet.

Average Joe

Anonymous said...

Since the Great Depression, the conventional prescription for such times is to have the government step in and create demand

The problem is that government followed the convention prescription even during times of abundance and prosperity. You make the medicine completely ineffective when you overuse it, especially when you continue to take it when you don't need it.

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