RALEIGH – Consider yourself lucky – you’ve just been witness to momentous events likely to be the subject of spirited political and academic debate for many decades to come.
Do I refer to the historic inauguration of Barack Obama? Not today.
I mean the series of massive federal bailouts of the nation’s financial sector, beginning in mid-2008 and accelerating during the last weeks of the presidential campaign. It wasn’t just the $700 billion package approved by the Congress. The series included even-larger actions by the Federal Reserve, the Federal Deposit Insurance Corporation, and other agencies to bail out banks, money-market funds, and insurers, plus the financial-services component of the automakers’ bailout.
In the coming weeks, there’ll be another series of momentous decisions, probably equally bone-headed, as Congress and the new administration promise to end a recession caused by excessive monetary creation, debt, and profligacy by, uh, creating more money, issuing more debt, and encouraging consumers to be more profligate.
I’ve written a lot about these matters already. Others have, or will. One of the few apt parallels between today’s economic situation and the Great Depression is that the present moment is destined to become fodder for articles, books, and intellectual discussion for generations. Because the economy will, indeed, recover at some point, some intellectuals will champion the bailout/stimulus mentality as needed and effective. Others will argue that it delayed the necessary financial restructuring, propping up prices and wages above their market-clearing levels and redistributing income from the prudent to the prodigal.
The specific data and propositions may be new, but the underlying ideas are not. Last week, the Christian Science Monitor did a great service by presenting a “classic debate about economic stimulus” featuring excerpts from two famous thinkers: John Maynard Keynes and Frederic Bastiat. One wrote in the 20th century, the other in the 19th. Both will be cited frequently in the 21st.
Keynes’ argument for activist government intervention boils down to this:
The State will have to exercise a guiding influence on the propensity to consume partly through its scheme of taxation, partly by fixing the rate of interest, and partly, perhaps, in other ways. Furthermore, it seems unlikely that the influence of banking policy on the rate of interest will be sufficient by itself to determine an optimum rate of investment. I conceive, therefore, that a somewhat comprehensive socialization of investment will prove the only means of securing an approximation to full employment; though this need not exclude all manner of compromises and of devices by which public authority will co-operate with private initiative.
Bastiat argues that interventions such as Keynes misunderstood the situation and prescribe the wrong remedy because they glide too glibly across the surface:
Have you ever witnessed the anger of the good shopkeeper, John Q. Citizen, when his careless son happened to break a square of glass?…
Suppose it cost six francs to repair the damage, and you say that the accident brings six francs to the glazier’s trade – that it encourages that trade to the amount of six francs – I grant it … you reason justly. The glazier comes, performs his task, receives his six francs, rubs his hands, and, in his heart, blesses the careless child. All this is that which is seen. But if, on the other hand, you come to the conclusion, as is too often the case, that it is a good thing to break windows, that it causes money to circulate, and that the encouragement of industry in general will be the result of it, you will oblige me to call out, “Stop there! your theory is confined to that which is seen; it takes no account of that which is not seen.”
It is not seen that as our shopkeeper has spent six francs upon one thing, he cannot spend them upon another. It is not seen that if he had not had a window to replace, he would, perhaps, have replaced his old shoes, or added another book to his library. In short, he would have employed his six francs in some way, which this accident has prevented.
The federal government has broken lots of windows in the past few months. Now, it seems, Washington is about to start knocking down entire walls – for our own good.
Hood is president of the John Locke Foundation