Two Ways To Handle Recession

Crossposted at Right Minds

At least there’s some good news. Citibank just announced a profit for the last quarter, and indicated that it would probably not require government aid. GM, too had some good news—it said that it could get through March without $2 billion in government aid after all. The Dow Jones is up above 7,100. Economically, things are looking up a bit—Barack Obama has decided that the economy is “not as bad as we think.”

If we are seeing the signs of recovery (and it’s still far to early to make a judgment on that), then it’s interesting to note that it has nothing to do with anything Obama has done, and really, nothing to do with anything Bush did either. (Bush’s biggest achievement here was passing TARP, and that wasn’t exactly a rousing success). It would be ironic, if precedented, if, for all the urgent rush for government aid, the economy recovered on its own. 

Economies can recover without, or in spite of, government intervention, and the fact that such a possibility was never even considered here is a failure for conservatism. There are, (very) broadly speaking, two ways of dealing with an economic crisis—the liberal way, and the conservative way.

The liberal method was what Washington (both the Bush and Obama Administrations) used for our current crisis. (As Peggy Noonan said her in column today, it really does need a name). It calls for massive government intervention till the trouble is quelled—bailouts, stimulus, sometimes even nationalization of private corporations. Basically, this view sees a financial crisis as a war, where the federal government has almost unlimited power to try to solve the problem. Nothing is beyond the pale.

The advantage of this way: when it works, the economic problem is solved quickly, and less painfully than it would have been otherwise. And it’s easier to see what went wrong, and to patch up those problem areas in the future.

Problem: this way usually doesn’t work. The New Deal was a much larger version of what Obama is trying to do. It was totally ineffective—after eight years of Roosevelt, the unemployment rate was twenty percent, down from twenty-five when he took office. It was only the start of World War II that ended the Depression.

And during the severe late-seventies/early-eighties recession, government action couldn’t do much to lift “malaise.” It took tax cuts (and, it must be said, massive government spending) to do that.

In fact, in all our nation’s history, it’s hard to find an example of government intervention lifting the economy out of recession.

The conservative solution: do nothing, and wait for the free market to sort things out. Advantage: it always works. Problem: it takes a while sometimes.

Left to its own devices, the free market will always eventually equalize and get the economy going again. Eventually. It can take quite a while.

Look at what would have happened had the government done nothing when the recession started. The housing market would have crumbled. The stock market would have collapsed, losing over forty percent of its value. Unemployment would have skyrocketed, and American households would have lost over ten trillion dollars.  There would have been painful bank failures, which would have lost billions of dollars for American families.

Except all that did happen, and even with government intervention. Of course, possibly things would have been worse were it not for the efforts of Henry Paulson and Barack Obama—but it is equally likely things would have been better. And if recovery would be prolonged by a laissez-faire approach, everyone agrees it will be similarly prolonged with Obama’s recovery plan. The liberal economic vision seems to give the same results that the conservative one does—but at a much higher price tag.