Dissent Of The Day

A reader writes:

I've long shared your  fiscal conservatism. But in the light of the current troubles, I can't say that I fully agree with the priorities you set in your post yesterday. There is a point at which the dangers of fiscal conservatism, in the form of making people suffer fully the consequences of their actions, outweigh the long-term harms likely to arise from vigorous government intervention.

You quote Zakaria saying "All of these tools [of governmental intereference] have long-term effects that are extremely troublesome, but they are nothing compared with the potential collapse of the financial system." Not being an economist, I can't evaluate how serious the risk is of a complete financial collapse, but let us assume for the moment that it is non-zero.

The likely effects of a complete financial collapse are hard to envision, but, from history, we know that they can include some Very Bad Things, with Very, Very Bad consequences for individuals. If the price of avoiding those Things is the interference we are seeing, plus the nasty hangover likely to follow in the form of inflation and stunted economic growth, it's not clear to me that the price is too high. (Though I would like to hear some more honesty from our leaders about the likely long-term harms of these bailouts.) After all, is 10% inflation too high a price to pay to stave off a wave of a 21st century fascism?

But that question assumes that these interventions will work, and you are absolutely right to remain unconvinced that more of the same borrowing and spending will get us out of this mess. It won't, and I hope most of the smart (?) people running the show recognize that. But it remains an open question as to whether the Obama stimulus package will be more of the same in the relevant sense of encouraging reckless (as opposed to prudent) spending. What it might do is keep the economy from dramatically and indiscriminately reducing its capacity to produce goods and services; sectors of the economy vital to our future (green energy) get a boost, and those that embodied the credit-binge (McMansions, $3,000 TVs, etc) are crushed. To me, Obama's stimulus plan emphasizing long-term investment in infrastructure and green energy seems precisely the right thing to do at this moment to encourage the conversion of economic capacity toward things we need (roads, wind turbines, 21st century power grid), to keep the incipient green energy sector from dying off and to partially reversing decades of underinvestment in infrastructure. The government would, of course, thereby be picking economic winners and losers, and *gasp!* investing tax dollars in the future productivity of the American economy, but there are sound policy reasons to do both.

Whether the Obama stimulus can do this is a pretty big 'if.' It's probably even money that the package is majority pork. All the same, moralizing about what we "deserve" does not seem to be most responsible thing to do given the stakes.

This captures the dilemma pretty well. I don't know the answer. I didn't mean to engage in moralizing. I meant merely that sending the signal that the government will always bail us out is not a good signal after the past two decades. But the distinction between investment in good things and random spending and borrowing is a good one.