Sunday, July 12, 2009

Larry Summers Interview: A Cynic's Interpretation

  • Obama is a central planner: his teams is trying to guide the U.S. economy to grow the "right" industries, and shrink the "wrong" ones.
  • The economy is going to get worse. How does he know? Maybe he knows of plans to unveil yet more policies that further destroy work incentives, in addition to those unveiled already: like means-tested mortgage modification, mean-tested student loan modification, unemployment insurance extensions, state income tax hikes, and marginal federal tax rate hikes on the "rich"!

There has been so much talk of "fiscal stimulus" and ways the government can help, but I think the ultimately the debate about public policy and the 2008-9 economy will be whether the government made things worse, or was just impotent.

There are few economists now saying that government caused the housing bubble (quite an exaggeration, I think), but I seem to be the only one saying that, even with a housing crash, the depth of this recession would have been significantly less if the government had not done its damage too.

2 comments:

Boomer said...

Where would we be right now if Bear Stearns and all the others had just been allowed to fail? Where would we be if Bush hadn't started the "stimulus" binge a year ago and no further "stimulus" was enacted this year? Where would we be if Bush/Paulson/Bernanke hadn't panicked last fall? I suspect the recession would be over by now. It seems to me that the bailouts are really just a tradeoff between depth of the recession and duration. If we hadn't intervened in the market, the recession might/would have been deeper but it would already be over. Instead, the bailouts and stimulus limit the depth of the downturn, but since there is no free lunch, the tradeoff is that the recession lasts longer. And by the way, causes more long term problems.

Joao Marcus said...

I´m getting to the conclusion that many ills, including the house bubble and ensuing credit crisis, is related to "political correctnes". In the 70´s the Civil Rights Act of 1964 began to be "reinterpreted" as pertaining not only to equality of treatment but also as requiring equality of outcomes, in which case disparate outcomes signalled "discrimintion". The New Haven firefighters is a case in point and was only turned down by the slimest 5x4 majority in the Supreme Court. There was the CRA (1977)and the Boston Fed study in 1992 that concluded that minorities were "discriminated" when it came to mortgage applications. Solution: Reduce mortgage underwriting standards and instruct the agencies to increase the share of loans to the "less affluent". The rest, including the speculation that ensued in the house market, is an almost natural consequence of this government (not market) failure.