Politics & Policy

The Beginning of the End?

Are we through the worst of this economic downturn?

Now that the stock market is beginning to rally and profits are once again being reported, we called and asked them what they make of this good news. Did TARP work, or at least help? Should President Obama get credit? Will he?

ANDREW STUTTAFORD

Was last fall’s financial crisis as bad as it then seemed? Yes, and were it not for TARP and other associated measures, it would have been dramatically worse. The financial system was sick, getting sicker — and on the edge of a panic on a scale that would likely have brought down many, many more banks than “deserved” to fail. The result would have been economic destruction that would have been anything but creative. The steps that were taken were very far from perfect, but, by making clear that the government printing presses were there, they eventually put a stop to the panic, something that simply had to be done at that time, however uncomfortable it made those of us who tend to be suspicious of government intervention in the marketplace.

For the most part, the “recovery” we have seen so far is little more than the ebbing of panic (very welcome though that is). To the extent that the remarkably poorly designed stimulus package has contributed to this essentially psychological phenomenon (and I suspect it did), it will indeed have produced a multiplier effect that counted. Looking ahead, it will be a while before we see anything that looks like a sustainable return to good times (particularly so far as unemployment is concerned). This return will be delayed still further if the Obama administration gives the impression that neither its willingness to borrow nor its willingness to tax know much in the way of limits.

Andrew Stuttaford is a contributing editor of National Review Online.

RICHARD EBELING

The stock market may have rallied last week, but this does not mean that the American economy is out of the woods. Indeed, there are strong reasons to believe that much of what the government has been doing will push a real and solid recovery further away than any of us would like.

Five years of misguided Federal Reserve monetary policy kept interest rates artificially low — for part of the time in the negative range when adjusted for inflation — and supplied the new money that created the housing, investment, and consumer-credit bubbles that have now burst.

Rather than allowing the market to adjust to the post-bubble reality, the federal government has done everything in its power to prevent the market from telling the truth in terms of what mortgages and investments are really worth. TARP and related government gimmicks, therefore, have hindered a return to sound and sustainable growth.

In addition, the Obama administration’s illusionary “stimulus program” is pushing the national debt to heights that threaten to impose future tax burdens that will cripple private-sector investment and job creation for years to come. And the Federal Reserve’s $2-trillion monetary expansion over the last year signals dangerously high inflation just over the horizon.

Economic recovery can come only through allowing the free market to balance supply and demand, and creating the proper incentives for private entrepreneurial innovation. Government intervention, monetary expansion, and expanding budget deficits promise a sluggish recovery and the worst features of increasing political paternalism.

– Richard Ebeling is a professor of economics at Northwood University in Midland, Mich.

BURTON W. FOLSOM JR.

True, the Dow pushed back over 9,000 last week. TARP may even have helped in the short run. But it’s too early for the Obamaites to dance in the end zone. At best, it’s the equivalent of a first down.

During hard economic times, the U.S. stock market tends to fluctuate. After the Dow crashed in October 1929, it recovered well over 50 percent of its losses in the next six months. But those gains were not permanent, because of persistently bad public policy under the Hoover administration. Interest-rate hikes by the Fed were followed by record tariff hikes and then income-tax hikes — all of which caused the Dow to go down and unemployment to go up. In a similar way, FDR’s deficit spending, tax hikes, and class warfare kept the Dow zigging and zagging throughout the 1930s, and delayed recovery for almost a decade.

Will the Dow continue to regain lost ground? Probably not, if bad public policy is continued. Mammoth deficits, threats of more tax hikes, and continued growth of government can kill any recovery, and this one is very fragile. Just as FDR’s economy benefited when the Supreme Court struck down his National Recovery Act (NRA) and Agricultural Adjustment Act (AAA), so Obama’s economy would benefit if the Blue Dog Democrats kill his health-care bill. Free markets that encourage entrepreneurs to invest are the recipe for recovery, but current policies are spoiling the stew.

– Burton W. Folsom Jr. is a professor of history at Hillsdale College and the author of New Deal or Raw Deal?

STAN LIEBOWITZ

We seem to be through the worst of the financial crisis. I give credit to Fed Chairman Ben Bernanke, who was very creative in flooding the economy with liquidity and keeping markets functioning. By keeping the financial sector intact, he avoided more serious damage to the economy. The economy is probably now hitting bottom in terms of growth, and it has strong recuperative powers — if the Obama administration’s plans to eviscerate high-income earners don’t undo all the good work.

Obama’s main contributions, if you can call them that, were to funnel tremendous amounts of taxpayer money into auto companies, which I believe will prove to be a mistake, and to let Congress design the stimulus program, which is just getting started at throwing money away.

Bernanke’s second magic act will have to be to remove all the money he has created before it creates a price inferno. Given his apparent interest in being reappointed, I fear that he will be slow to raise the interest rates and mop up the excess money supply, leading to at least a modest level of above-normal inflation, with a chance for considerably worse.

Bernanke is a talented fellow, and maybe he can pull it off. Still, I am heavily invested in Treasury Inflation-Protected Securities (TIPS).

Stan Liebowitz is Ashbel Smith professor of economics and director of the Center for the Analysis of Property Rights and Innovation at the University of TexasDallas.

DAVID C. JOHN AND J. D. FOSTER

Fed Chairman Ben Bernanke was right when he said, “In a financial crisis, if you let the big firms collapse in a disorderly way, it will bring down the whole system.” At the height of the financial crisis, TARP was part of a broad policy response providing markets a critical dose of confidence when it was sorely lacking.

However, it was quickly misused for other purposes, including bailing out auto companies and several non-bank financial firms. TARP is now likely to become even more of a massive slush fund that can be used to assist any politically sensitive entity. Even worse, it has given those favoring government micro-management of financial services the excuse they needed to press their agenda. It needs to be closed down in an orderly fashion as quickly as possible 

Market confidence may not be tangible like a new program or a dollar spent, but market confidence is the true source of credit-market liquidity. And that was what was needed most last fall. But we are not out of the woods yet. Total output should climb, albeit slowly, by the third quarter. Yet in many areas, the worst is yet to come — especially in unemployment, but also in home foreclosures and loans to commercial property.

David C. John is a senior research fellow at the Heritage Foundation, and J. D. Foster is Norman B. Ture senior fellow in the economics of fiscal policy at the Heritage Foundation.

RAYMOND J. KEATING 

The worst of the current recession is likely behind us. But that does not mean solid growth is just around the corner. And the Obama administration, TARP, and the so-called “economic stimulus” package certainly do not deserve any credit.  

 

In fact, largely because of the unprecedented government intervention in the economy since September of last year — starting under the Bush administration — this recession has been deeper and dragged on longer than otherwise would have occurred. 

 

Five major problems will restrain the recovery whenever growth finally does turn positive.  

 

First, the massive expansion of government — with federal spending expected to register nearly $4 trillion in fiscal year 2009 and $3.6 trillion next year (up from $2.7 trillion in fiscal year 2007) — means that more resources are being diverted, whether through borrowing or taxing, from productive private-sector ventures to political, wasteful public-sector projects. 

 

Second, huge, destructive tax increases loom on the horizon, including higher personal-income, capital-gains, dividend, and death taxes. 

 

Third, major efforts to fundamentally alter our health-care system and the energy sector of our economy threaten to push costs higher for entrepreneurs, businesses, investors, and consumers. 

 

Fourth, the historic expansion in the money supply by the Bernanke Fed has laid the groundwork for an acceleration of inflation in the near future. 

 

And fifth, all of this frenetic government activity creates enormous uncertainty and scares entrepreneurs and investors. Risk-taking, innovation, and invention will suffer accordingly. 

 

The recent bump-up in financial markets can be tied, at least in part, to the Obama health-care and energy/climate initiatives’ facing problems in Congress. But there’s nothing to grab on to in terms of positive, pro-growth public policy. The best to hope for is that nothing happens legislatively. And if the Obama agenda does regain traction, get ready for another sell-off. 

 

Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council, and a columnist with Long Island Business News.

DONALD L. LUSKIN

There are two distinct but intertwined issues in the nascent economic recovery. With respect to one of them, the Obama administration deserves applause. With respect to the other, it deserves blame.

Obama was wise to appoint Timothy Geithner as treasury secretary. Though a poor communicator and a man who does not radiate a sense of leadership and confidence, Geithner has nevertheless continued and fine-tuned the rescue efforts begun by his predecessor, Henry Paulson, and brought them to a point where they have finally succeeded. Thanks to him, the banking crisis really is over.

Geithner’s contribution was to restore a sense of order to the way the government would deal with troubled banks. Previously, there was no sense that the authorities knew which banks were troubled until they were already collapsing. And when they did collapse, there was no rhyme or reason to which banks were saved and which weren’t, or, for the banks that were saved, which classes of investors would get bailed out and which classes would be wiped out.

By ordering a uniform “stress test for all large banks, Geithner assured the public that the authorities were rigorously examining the health of all major banks, putting the government in a position to get ahead of problems before they became disasters. And by stating that, for any bank that failed the stress test, the Treasury stood ready to buy convertible preferred stock, he assured the public that all banks would be rescued, and no classes of investors would be wiped out. Since Geithner announced this policy in early February, the Treasury hasn’t had to spend a penny bailing out banks. The solution turned out to be confidence, not money, and through these steps, Geithner simultaneously restored confidence in the banks and in the way government would deal with the banks. It was masterly.

Because the sudden credit crisis was the prime cause of the recession, with its alleviation the recession is clearly bottoming out. We won’t be able to declare that for sure for several more quarters. But it’s likely that when we are able to look back, we’ll say that the bottom was in May or June 2009.

All that having been said, the Obama administration is doing many things to erode the sense of confidence that is building in the economy, and to make the recovery from recession slow, lackluster, and jobless.

Instead of critical uncertainty about the solvency of banks, we now have chronic uncertainty about tax rates, regulation, and the role of government in large sectors of the economy, most critically health care.

It is no coincidence that the stock market bottomed in March, when key congressional Democrats began repudiating “change initiatives promoted by the Obama administration: mortgage “cramdown, union “card check, a cap-and-trade carbon tax, and so on. The latest rise in stock values coincides with the repudiation by key Democratic senators of the House’s proposal to pay for health-care “reform with a surcharge that would have added as much as 5.6 percentage points to tax rates on wages, dividends, and capital gains starting in 2011.

Obama was elected by a landslide on an agenda of “change, but in an already destabilized economy, change must happen gradually, and must be debated and considered by the people. There is nothing worse that the Obama administration could do for the economy now than to ram through its “change initiatives at a rate faster than they can be digested. In an economy as fundamentally destabilized as ours, even pro-growth initiatives ought to be slowed down so that we can all catch our breath.

– Donald Luskin is chief investment officer of Trend Macrolytics LLC, an independent economics and investment-research firm.

 

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