The Stimulus and the Somme
Mark Thoma gives us Joseph Stiglitz and Martin Feldstein being interviewed by Charlie Rose. I listened to it last night, and I found it so chilling that it adversely affected my sleep. Two issues stand out.
1. Both of them are keen on re-working mortgages. Neither of them mentions non-owner-occupied housing or any of the other issues that make re-working mortgages extremely difficult. At one point, Stiglitz says that banks may be postponing writing down loans because they are waiting to see what sort of bailout they might get from the government. But he doesn’t draw the obvious conclusion that government interference is the problem, not the solution.
2. Both of them are keen on trying a big stimulus. Stiglitz says that everything done so far has been a failure, but again he doesn’t draw the obvious conclusion. Instead, he says we have to try something bigger and different.
I was reminded of the Battle of the Somme, one of the worst policy blunders of all time. Having experienced nothing but failure using offensive tactics up to that point, the Allies decided that what they needed to try was….a really big offensive. Just as Feldstein and Stiglitz pay no attention to the on-the-ground the housing market, the British generals ignored the impact of machine guns on men advancing over open fields.
My guess is that in 1916, anyone who doubted his own ability to direct an enormous offensive involving hundreds of thousands of soldiers would never have made it to general. Similarly, today, anyone who doubts the ability of a handful of technocrats to sensibly allocate $800 billion would never make it into government or the mainstream media.
How many people will have meaningful input in determining the overall allocation of the billion stimulus? 10? 20? It won’t be more than 1000. These people–let’s say that in the end 500 technocrats will play a meaningful role in writing the bill–will have unimaginable power. Remember that what they are doing is taking our money and deciding for us how to spend it. Presumably, that is because they are wiser at spending our money than we are at spending it ourselves.
The arithmetic is mind-boggling. If 500 people have meaningful input, and the stimulus is almost $800 billion, then on average each person is responsible for taking more than $1.5 billion of our money and trying to spend it more wisely than we would spend it ourselves. I can imagine a wise technocrat taking $100,000 or perhaps even $1 million from American households and spending it more wisely than they would. But $1.5 billion? I do not believe that any human being knows so much that he or she can quickly and wisely allocate $1.5 billion.
Once again, I am very happy that we are not fighting World War I. The Paulson/Obama offensives may be squandering resources, sowing confusion in households and businesses, and creating large financial imbalances. But they are not sending young men charging into machine guns.