Friday, February 13, 2009
“We Are All Socialists now,” declares the cover of Newsweek magazine. Well, speak for yourselves. Oh, and let us know how that’s working out for you.
Not terribly well, if other media reports are to be believed. “Newsweek dropped its [subscription] rate base to 2.6 million, from 3.1 million a year ago, and people briefed on its plans said it was likely to go below 2 million by next year,” The New York Times reported recently. Maybe a million or so people have decided they’d rather have their subscriptions dead than read red propaganda.
Still, in a backward fashion, the magazine may be on to something.
“We remain a center-right nation in many ways -- particularly culturally,” Newsweek admits. “And our instinct, once the crisis passes, will be to try to revert to a more free-market style of capitalism -- but it was, again, under a conservative GOP administration that we enacted the largest expansion of the welfare state in 30 years: prescription drugs for the elderly.”
And that’s exactly the point. The Bush administration’s big mistakes were when it increased discretionary and entitlement spending. So, having said that, why would anyone believe that the answer to the financial crisis is more federal spending?
Yet oddly, that’s exactly the lesson Newsweek draws from today’s economic problems. “The answer may indeed be more government. In the short run, since neither consumers nor business is likely to do it, the government will have to stimulate the economy.” President Obama agrees with that logic.
He dismissed conservative complaints that the “stimulus” bill raced through Congress is too expensive. “When I hear that from folks who presided over a doubling of the national debt, then, you know, I just want them to not engage in some revisionist history,” Obama said. “I inherited the deficit that we have right now and the economic crisis that we have right now,” he told reporters during his first televised news conference. It went so well we can expect the second to be scheduled some time in 2011.
But that “the other side spent, too” dodge doesn’t get Obama and Newsweek out of their trap. If big federal spending is a problem, the answer should be to reduce spending -- not to borrow and throw out an additional $1 trillion or so.
Obama also misreads the lessons of recent history. “If you delay acting on an economy of this severity, then you potentially create a negative spiral that becomes much more difficult for us to get out of,” he told reporters. “We saw this happen in Japan in the 1990s, where they did not act boldly and swiftly enough and, as a consequence, they suffered what was called the lost decade, where essentially, for the entire ’90s, they did not see any significant economic growth.”
Again -- true enough. But the lesson is that, in the 1990s, Japan did just what Obama is proposing. It launched a series of massive public works projects, costing hundreds of billions of dollars (sound familiar?). Government spending jumped from 31.6 percent of the nation’s GDP in 1991 to nearly 38 percent today. Yet the Japanese econ¬omy grew at an annual rate of only 0.6 percent between 1992 and 2007. That may not be the road the United States ought to travel.
Finally, Obama waded into the area that really caused today’s problems: the collapse of the housing market. “Now, you know, the federal government doesn’t have complete control over that,” the president admitted humbly. “But if our plan is effective, working with the Federal Reserve Bank, working with the FDIC, I think what we can do is stem the rate of foreclosure and we can start stabilizing housing values over time.”
This would be little more than throwing good money after bad. It was federal interference in the housing market (through tax credits and Government Sponsored Enterprises, including Fannie Mae) that helped create the housing bubble, driving prices beyond what the market could bear.
The sad fact is that those who bought homes in 2007 and 2008 at the top of the market will have to wait years before their homes will be worth more than they paid. This is what happens in free markets -- ask anyone who bought a tech stock in late 1999. If Washington couldn’t prop up the price of Qualcomm stock a decade ago, it won’t be able to prop up the value of housing stock today.
The Newsweek article points out that “the savings rate dropped from 7.6 percent in 1992 to less than zero in 2005,” a consumer spending spree fueled by soaring housing values and cheap imports from China.
These days, Americans are saving again, thus proving that every bit of economic bad news also brings economic good news. Our nation’s trade deficit hit a six-year low last month, with 2008 marking the second consecutive year our trade deficit has declined.
Let’s forget socialism and maybe give capitalism a try before we declare it dead.