Many conservatives rightly worry about the economic impact of
the liberal policy agenda emanating from Washington, D.C. They warn
of a dollar collapse, tout gold as the investment of choice, and
forecast that the stock market will not go higher. Many agree that
things have gotten better in recent months, but boldly predict a
double-dip recession, or even Great Depression II.
The problem is that they are confusing the long-term economic
impact of big government with the short-term impact. It is true
that big government policies of higher taxes, increased spending,
national health care, and a carbon tax will hurt the economy, drive
up unemployment, and create inflation. But, it is also true that
all these things are unlikely to happen “right now.” These are
long-term problems.
So far, the health care proposals on the table and Cap and Trade
are both back-end-loaded—their true cost will not be felt for at
least three years, maybe more. And tax hikes are not going to be a
reality until at least 2011, maybe later. In the meantime, the
economy is climbing out of a very deep hole—the first true economic
panic since 1907—what I call the Panic of 2008. And this panic was
caused by policy mistakes made by George Bush and Hank Paulson.
In my forthcoming book, It's Not As Bad As You Think
(Wiley, 2009), I argue that easy monetary policy alone (combined
with a V-shaped bounce off a very low bottom) will lift economic
activity strongly throughout 2010. The economy is set to boom, just
as it did in 1975–76 in the midst of a decade of terrible
government policy. Another example is the “Clinton Recession” that
never happened. Easy money in 1993 kept the economy afloat despite
the Clinton tax hikes and the attempt at HillaryCare.
As a result, when conservatives argue that we should all be
digging metaphoric foxholes and keeping ’round the clock vigilance
against the worst type of economic calamity, they’ll begin to look
foolish over the next 12 to 18 months. One could argue that
conservatives’ ability to stir up fear about the impact of these
types of policies on the economy is politically effective. After
all, it worked with President Clinton, who was forced to change
stripes mid-stream. But an economic recovery was already underway
when he was elected.
When President Obama was elected, the economy was on the way
down. So, as it begins to recover, it is going to look as if
government stimulus, cash-for-clunkers, and the calm demeanor of
the new photogenic and hopeful president were the cause. We’re
already hearing some of this. And if that line of thinking catches
on in the months ahead, then conservatives who keep saying, “Buy
gold and head for the hills,” will be walking into a right
upper-cut.
The V-Shaped Recovery
There are three things lifting economic activity and the stock
market right now. First, is a corrective fix to mark-to-market
(MTM) accounting. The American Spectator played a crucial
role in this when it ran a series of high-profile op-eds in late
2008, highlighting the damage done by MTM rules. And in March 2009,
the House Financial Services Committee decided to hold a hearing
with the Financial Accounting Standards Board and put pressure on
it to change the rules. The announcement of that hearing in
mid-March coincides perfectly with the bottom of the stock
market.
By allowing banks to use “cash flow” to value assets, not just
fire-sale bids in the marketplace, the change in rules brought to
an end the vicious downward spiral of capital impingement. Since
then, government programs like PPIP, which was designed to buy up
the toxic assets, have basically withered on the vine. By
mid-summer, the Treasury was saying that the budget deficit would
be smaller by roughly a quarter billion dollars this year because
the anticipated need to prop up banks had evaporated.
Second is that the panic is ending. In the fourth quarter of
2008, economic activity plummeted—what economists call a drop in
the velocity of money. Grocery store sales fell for the first time
in 50 years, while car sales fell below the scrappage rate.
Everyone, except for the true hermits, changed their behavior and
pulled back. This could not last. And now, economic activity is
bouncing back.
Third, the Federal Reserve is maintaining a super easy monetary
policy stance. With new money flooding into the system and interest
rates near zero, the Fed is easier than it has been in decades. The
economy is floating on a sea of liquidity. This is impossible to
fight. The economy can’t help but head higher.
In addition to these three developments, what we are finding out
is that capitalism is not dead. Despite a widespread belief that
our system of private enterprise had become overly complicated,
overly risky, fragile, and impaired, the economy is proving its
resilience once again.
I can understand liberals not believing in the capitalist
system. They think free markets are unstable and government is the
solution. What I don’t understand is how quickly conservatives gave
up on capitalism. One problem is that people, of any stripe,
misunderstand entrepreneurship. Taking economic risk does not mean
gambling. Entrepreneurial decisions are designed to limit risk and
increase the odds of success. And after 200-plus years, and
trillions of decisions, the American entrepreneur has created a
very robust and resilient economic system. It is nowhere near as
fragile as people think.
That’s why it is bouncing back so rapidly although many, mostly
non-entrepreneurs, seem scared of their own shadows right now. At
this writing, single-family housing starts are up for five months
in a row and are now 37 percent higher than they were in February
2009. Just about every piece of economic data, except for consumer
confidence, is tracing out a V-shaped recovery. But confidence has
never been a leading indicator and it will follow the economy in
the months ahead.
Conservatives should be making moral arguments against big
government, and pointing out the long-term economic damage of
undermining freedom, but for some reason, most of our conservative
politicians are afraid of moral arguments. This is why they would
rather fret about the short-term economic data.
The free market capitalist system is the best system for
supporting human dignity and pushing humans to behave morally. It
does this by allowing individuals to take personal responsibility
for their behavior. It allows individuals to find their most
productive occupation, and forces people to face the challenges of
the real world head on. It respects competition between free
people. This is why it works and why only capitalism, of all
systems, has led to permanently and significantly higher standards
of living.
Today, the government spends roughly 40 to 45 cents of every
health care dollar, while it also spends roughly 75 cents of every
education dollar. These two sectors have more problems than any
other two sectors of our economy. The greater the government
interference in the competitive landscape, the higher the prices
and the lower the quality. What more proof do we need?
In the end, undermining capitalism and supporting big government
will harm the economy and hollow out people. Nonetheless, the
economy is set to boom in the next 12 to 18 months and if every
argument against bigger government is based on the performance of
the economy right now, its advocates will appear to be wrong. If
that ends up helping to push more government programs, it will be a
very sad development indeed.
