Thursday, January 29, 2009

First, do no harm

Apparently politicians are not required to take the Hippocratic Oath. The politicians who protected Fannie and Freddie have thus far cost the taxpayers $300b just in direct aid to the two government-sponsored enterprises, but it hasn’t cost them their jobs.

With that stellar record of government intervention behind us, on the strength of the popular president’s persistent pressing, the $800+ billion “stimulus” bill overwhelmingly passed the House Wednesday; the only dissent came from the small GOP minority and 11 (mostly “Blue Dog”) Democrats. Since no one knows what the plan will do, the plan is certain to fail the “do no harm” test even if it leverages the current financial panic to reward key allies.

Interestingly, one of the harshest criticisms of the plan came this week from an Obama campaign contributor, former Harvard wunderkind turned Columbia economist Jeffrey Sachs. Writing in the Financial Times from a perspective of fiscal discipline that was once dominant in macroeconomics, Sachs argues that the benefits of the “stimulus” are likely overestimated and the predictable harm has been completely ignored:

The US debate over the fiscal stimulus is remarkable in its neglect of the medium term – that is, the budgetary challenges over a period of five to 10 years. Neither the White House nor Congress has offered the public a scenario of how the proposed mega-deficits will affect the budget and government programmes beyond the next 12 to 24 months. …

We are told that we have to rush without thinking lest the entire economy collapse. This is belied by recent events. The spring 2008 stimulus package of $100bn (€76bn, £71bn) in tax rebates was rushed into effect in a similar way and we now know it had little stimulus effect. The rebates were largely saved or used to pay down credit card debt, rather than spent. The $700bn troubled asset relief programme bail-out was also rushed into effect and its results have been notoriously poor.

The Tarp has not revived the banks or their lending, but it has supported a massive transfer of taxpayer wealth to the management and owners of well-connected financial institutions. …

The most obvious problem with the stimulus package is that it has been turned into a fiscal piƱata – with a mad scramble for candy on the floor. We seem all too eager to rectify a generation of a nation saving too little by saving even less – this time through expanding government borrowing. …

The White House and Congress have stated an amount – $825bn to be spent mostly over two years – on top of a deficit that is already projected to reach $1,186bn in fiscal year 2009 without the stimulus package. Many of the details of allocating the $825bn are being left to Congress with the aim of reaching a bipartisan consensus. The result is shaping up to be an astounding mish-mash of tax cuts, public investments, transfer payments and special treats for insiders.
Meanwhile, one of the most successful no-bailout financial executives explains the inevitable failure of Congress’s desire to replace free markets with central planning:
When you start relying on government to do business' job, you've got real issues. So--real conflict there, which is too many people relying on government or, basically, the man behind the curtain. There is no man behind the curtain. There's no politician that can come in and run the banks better than the guys who are bankers. There may be different bankers who can run these banks, but come on, a politician?
The executive, Cantor Fitzgerald CEO Howard Lutnick, has more credibility than any of the dozens of bailout seeking bankers. Not just because he had a good financial year, but because he’s led a miraculous revival of the company that lost 69% of its employees in the 9/11 World Trade Center attack, and has been paying to support those families ever since while achieving the turnaround.

Instead, much of the public is being spent under false pretenses:
You know, with so much public money going into the banks, there really could be a call of, "Well, hey, these guys shouldn't be getting paid" and "Hey, they should be making loans for social reasons," and this goes on and on. So, I think there's a real issue of mixing social policy with fiscal policy. And you're seeing that now in the stimulus package. If you dissect it, you're going to see a lot of social policy in there. They're calling it a stimulus package. Social policy can be good, but it's just not a stimulus package.

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