The incoming administration is talking about spending hundreds of billions on public works with the hope of creating some jobs, but remember: 93.3% of Americans, though shaken, already have jobs. So what to do?
The government must do something, and something fairly big, to jump-start the economy, an economist friend told me. His point was that the private sector is too shell-shocked to climb out of the hole it is now in, and government needs to take the lead. He also quoted the old shibboleth among economists -- the "fallacy of composition" -- which argues that what might be a good course of action for an individual can lead to disaster if widely adopted by members of the larger group. In this case, disaster could be the result if there was too strong a preference for savings over consumption.I disagree with this whole line of thought. It reminds me of the open letter that 364 economists addressed to British Prime Minister Margaret Thatcher in 1981, condemning her for daring to cut public borrowing in the midst of a recession, which was contrary to the Keynesian orthodoxy at the time. They did not accept Mrs. Thatcher's reasoning that too much public-sector borrowing and government-directed investment could only crowd out private-sector borrowing and risk-taking.
They also implicitly rejected Mrs. Thatcher's strongly held belief that both governments and individuals must be guided by fundamental rules of common sense and frugality, in good times and bad. The economists described her thinking on this score as naive. Mrs. Thatcher spurned the collective wisdom of the 364 economists, seeing their advice as just more of the same failed interventionist policy prescriptions which the country had followed for over three decades. When she came to power in May 1979, the British economy, by every measure, was in worse shape than the U.S. economy is today. Inflation was out of control. Unemployment was high and rising rapidly. Job creation had been at a total standstill for almost a decade and a half...
... President-elect Barack Obama has said that he expects things to get worse before they get better. If the experience of the first Thatcher administration is anything to go by, that will certainly be the case. For one thing, some "hidden unemployment," as Mrs. Thatcher called it, will be flushed out into the open. This will be the case with the expected closure of the Big Three's "job banks," which pay almost full wages and benefits to several thousand auto workers for doing nothing.
With the elimination of much higher levels of "over-manning" in parts of British industry that were heavily unionized and subsidized, unemployment doubled to 12% in Mrs. Thatcher's first three years in office. Yet by sticking to her policies of lightened regulation, reduced trade barriers, privatization of a raft of publicly owned companies, reduced taxation, and the adoption of laws to prevent abuses of union power, Mrs. Thatcher achieved something few if any of today's economists have begun to consider. She achieved a genuine, productivity-led recovery that transformed Britain from perennial basket case into the Europe's most improved and vibrant economy.
U.S. policy makers and professional economists should study her example in order to turn this time of crisis into useful and enduring change. As she herself said, "Economics is too important just to be left to the economists."
I seem to detect an imho rather illogical line of thought there where Mr. Wilson writes: "President-elect Barack Obama has said that he expects things to get worse before they get better. If the experience of the first Thatcher administration is anything to go by, that will certainly be the case.", because it implies that Mr. Obama is going to do what Mrs. Thatcher did. This, of course, he won't do, since it is clear for everyone but the deaf and blind that the president-elect is hell bent on treating the US to a New Deal v2.0. Because Mr. Wilson rightly concludes by pointing out the merits of the Thatcher method, I assume it was just a lapsus of his. Let us sum up Thatcher's key measures, as noted by Wilson:
* lightened regulation
* reduced trade barriers
* privatization of a raft of publicly owned companies
* reduced taxation
* the adoption of laws to prevent abuses of union power
Let us now see how Obama's proposals measure up to Thatcher's success recipe
* Obama has promised more regulation
* Obama stance on NAFTA varies between lukewarm enthusiasm and closet hostility
* Obama's plans for "federal oversight" of the Big Three reeks almost like a desire to nationalize an important part of US carmakers
* Under Obama, the Bush tax cuts will expire, and the top two tax rates will likely to return to 36 and 39.6 percent. That's just for starters
* Obama wants to make the "Employee Free Choice Act" the "Law of the Land".
Don't know how it is with you, but I can't find anything Thatcherite in Obama's to do list. To top it all off, he has promised to embark on a public infrastructure project "unseen since the fifties". Good luck with that. He should know that keynesianism does not work, but I'm not making myself any illusions anymore. During a 60 Minutes appearance in November, Obama heaped praise on a book dealing with FDR. Over at Instapundit, a commenter named Greg Gransden wrote:
I watched it, too. I would have been more reassured if the FDR book Obama says he’s been reading was Amity Shlaes’ “The Forgotten Man,” which painstakingly demonstrates how Roosevelt’s economic policies helped to prolong and worsen the Great Depression.
Unfortunately, the book Obama’s been reading actually lavishes praise on FDR’s economic management in the early months of his presidency - which seems to me precisely the wrong lesson to take away from that period.
With Glenn Reynolds, I might say: "Indeed".
Barack Hussein Obama. Machinist of the Perfect Economic Trainwreck, barreling toward you. Don't say you haven't been warned.
MFBB.
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