Most of Washington has reached quick consensus: Government must do something big to shock the economy, and it should cost between $800 billion and $900 billion.
But dissident economists and investment professionals offer a much different take: Most of Washington is dead wrong.
Instead of fighting over what should go in the economic stimulus bill, pitting infrastructure spending against tax cuts and contractors against contraceptives, they say lawmakers should be fighting against the very idea of any economic stimulus at all. Call them the Do-Nothing Crowd.
“The economy was too big. It was all phantom wealth borrowed from abroad,” says Andrew Schiff, an investment consultant at Euro Pacific Capital and a card-carrying member of the stand-tall-against-the-stimulus lobby. “All this stimulus money is geared toward getting consumers spending and borrowing again. But spending and borrowing were the problem in the first place.”
Washington has a habit of passing legislation in a crisis and suffering from morning-after regrets — the Iraq war, the Patriot Act and last year’s original bank bailout plan come to mind. So we thought it would be wise to air the views of the naysayers toward Washington’s latest consensus approach.
First, we’ll look at the Do-Nothing Crowd. On Thursday, we will hear from the go-bigger-or-go-home gang, who argue that even $1 trillion in spending is far too small — and that the stimulus package should be much bigger than $825 billion.
There is no doubt these are minority views. Most lawmakers, economists and policymakers say the economy desperately needs a massive infusion of money to prevent collapse — and needs it now. The Obama administration, backed by many economists, says unemployment could easily top 10 percent and the gross domestic product could tank absent government intervention.
The language used to make the case for stimulus is stark and gloomy — and, by all measures, pretty accurate. But there is also a caveat attached to every solution proposed: that it simply might not work. Economists on the right and left say there is a chance, perhaps a decent one, that $1 trillion injected into a $14 trillion economy might be too little, too late to turn things around anytime soon.
In fact, government stimulus plans have a long history of failure. Remember last February’s $168 billion economic stimulus package? President Bush called it “a booster shot for our economy” and promised that it was large enough to have an effect. It wasn’t, and it didn’t work.
This time around, the Do-Nothing Crowd argues that the new spending — which dwarfs last year’s effort — is probably insufficient and definitely unwise. It is largely an economic argument. But there is also a cultural dimension. Many of the Do-Nothings argue that a painful recession is the best way to destroy America’s runaway culture of irresponsibility and debt. Economic turmoil, after all, has a way of grounding Americans.
Schiff and the other Do-Nothings argue that the government should simply allow the economic chips to fall where they may. Dramatic belt-tightening across the board is the only way, they say, to stop the endless cycle of borrowing.
“Our standard of living needs to come down to the point where it can be supported by organic output,” says Schiff. “It’s brutal, but it’s called capitalism, and it works. The alternative is called socialism, and it doesn’t work.”
To help push that argument on Capitol Hill, the libertarian Cato Institute plans to take out a full-page ad in The New York Times and The Washington Post on Thursday and Roll Call on Wednesday, making the case against stimulus. The ad will include the names of 250 economists across the country who oppose the massive spending and tax cut program that’s backed by President Barack Obama and many congessional leaders. Many of those are Do-Nothings, while others have more nuanced views about how the proposal as packaged won’t work.
For the Do-Nothings, the argument isn’t about economic nuance, it’s about right and wrong. They say that borrowing more money to finance a stimulus package will pass a crushing and possibly permanent debt load on to the next generation. “The question is,” says Chris Edwards, the director of tax policy studies at Cato, “is this morally proper?”
Edwards says no. “Policymakers are saying: ‘Screw the future generations.’”
The Do-Nothing Crowd also points to some of the hidden upsides of the recession — developments they say are already helping position the U.S. economy for a recovery.
The most noticeable impact is that housing prices are coming down to a more sustainable level. For first-time buyers, this is reopening a path to homeownership that had been all but blocked by hyper-inflated prices. The National Association of Realtors reported this week that housing sales rose 6.5 percent from November to December, largely on the strength of bargain hunters snapping up foreclosed properties. That could be a sign that the housing market is on its way to a balancing point at which lower prices once again draw new buyers into the system.
In the meantime, weak companies that have problems competing are being weeded out of the system. For example, Circuit City announced that it would liquidate its stores and assets, laying off an estimated 34,000 employees. That’s not necessarily a tragedy, argues Cato’s Edwards. “The weak are getting weeded out. Circuit City had crappy customer service, and I’m glad that Best Buy will survive and Circuit City will not.” Ideally, the collapse of weaker competitors is an economic opportunity for the stronger survivors to gain market share — and hire new workers.
Another galvanizing effect of the downturn is that companies have been forced to face the reality that they haven’t been making products that customers actually want to buy. General Motors CEO Richard Wagoner, for example, conceded in testimony on Capitol Hill in December that his company had made mistakes, including “not moving fast enough to invest in smaller, more-fuel-efficient vehicles for the U.S. market.” As the old saying goes, imminent death has a way of focusing the mind.
An even better consequence of recession, say the Do-Nothings, is that American families are finally starting to pay down the dangerously high debt levels they’ve accumulated. One of the reasons last year’s economic stimulus failed, in fact, was that Americans used the money to pay off bills, not to spend on new products. In a country that had developed a negative personal savings rate, that’s probably a good thing.
And here’s something truly surprising: The recession might even be good for your health. The New York Times reported that Americans are drinking less alcohol, noting that a “study based on surveys by the Centers for Disease Control and Prevention from 1987 through 1999 found that drinking in this country generally drops during economic hard times, especially among heavy drinkers.” That may be not due to a renewed sense of sobriety and responsibility, but rather to the decline in workers’ discretionary income. Still, liver surgeons will tell you that less drinking is probably healthy.
For all that, the Do-Nothings fully expect to lose the argument in Washington this week. The political momentum is all on the side of the stimulus. “Politicians feel a need to validate their own political authority, and they feel they have to do something,” says Robert Romano of the nonprofit group Americans for Limited Government.
Nobel Prize-winning economist Edward Prescott of Arizona State University agrees. “Congress has to do what peope want, and it’s clear that the people want this stimulus,” Prescott says. “But I just wish the people would tell them: ‘Don’t do it.’”