Monday, January 28, 2008

Recession or Wirehair Terrier

Steve Chapman at Reason Magazine on line has a nice article about the potential recession and the stimulus package:

Washington, D.C. is a place where delusions go to thrive. That explains why Congress and the president are now agreed on remedies that will not work, expending money they do not have, to fix a problem that may not exist.

The alleged problem is a recession. From the sounds of panic, you would assume we are already in a deep downturn. In fact, that does not appear to be the case, and many economists doubt we will have a recession (defined as two consecutive quarters in which total economic activity declines) at all.

He quotes a Citigroup economist (who surely must know something about the potential recession since Citigroup is so good at these things):

Steven Wieting, an economist at Citigroup, predicts growth of 1.2 percent. But like our elected officials, he sees no point in getting hung up on technicalities. "Academic definitions aside, we'll call that a recession," he writes in a new report.

And in the best line I've read about the economy in a long time Chapman responds:

We can call it a recession or we can call it a wirehair terrier, but that won't change what it actually is: an expansion, albeit a modest one.

That is pure gold and had me spewing my iced tea on the computer screen. Chapman is a libertarian so he obviously doesn't like the stimulus package:

Notwithstanding that, President Bush and House leaders have agreed to pelt the economy with $150 billion in rebates and business tax incentives to rouse it from its lethargy. The idea behind the rebates is that consumers will use the cash to buy goods and services, keeping companies and workers busy supplying them. Business tax incentives are supposed to goose investment in plants and machinery. The two sides are agreed, in the mantra of the week, that these measures will be "timely, temporary and targeted."

In their dreams. Timeliness, in this case, is not unlikely—it's impossible. The Internal Revenue Service, it seems, is fully occupied at the moment sending out tax forms and processing returns, and will be for a while. So even if the program zips through the Senate, the checks probably won't go out until June and won't all reach the beneficiaries until August. The money itself will take months to be spent, if it gets spent at all -- postponing the intended boost until next football season.

If a recession is already underway today, it could very well be over by then. This is the equivalent of a doctor telling a patient that she may have pneumonia and promising to put her on antibiotics—in October.

He concludes:

So, contrary to its billing, the package is likely to be tardy and scattershot, with a lingering, bitter aftertaste. Even if it could be implemented perfectly, though, it might still be a futile endeavor. Alan Auerbach, an economist at the University of California, Berkeley, looked at past fiscal policy initiatives and found "little evidence that these effects have provided a significant contribution to economic stabilization, if in fact they have worked in the right direction at all."

In other words, we may spend a lot of money to accomplish nothing. Note to our leaders: We can do that for free.

I agree completely.

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