Ben Stein was on Charles Osgood's Sunday Morning today, and he did a little segment in which he "put on his economist hat" and explained how to deal with the recession (I searched for a clip on the tubez, but no luck). His argument was that the downturn in the economy had to do with the supply and velocity of money, that Ben Bernake of the Federal Reserve was doing a great job of expanding the money supply, but that money wasn't being spent because of a decline in consumer confidence. Stein claimed that the Obama administration was scaring people into saving too much money and that if all the higher-ups would get together and say that the recession would be over in twelve months, then it would be.
This bothers me, because Stein is no idiot, but between his recent rhetoric on this and his laughable intelligent-design doc Expelled, he's not scoring any intellect points and shedding most of what he gained (along with moxy-points) during his stint on Win Ben Stein's Money.
Before I delve into this, I will throw out the caveat that I have an economic degree and that I regularly read up on economics. I'd say my understanding is better than most, but still far from perfect, so keep that in mind. Now, Stein.
Stein says: The money supply and money velocity are what determine the health of the economy.
The reality: sort of. Money velocity is definitely important, but money supply has more to do directly with inflation. When the Fed expands or contracts the money supply, it does so to affect the interest rate. It's the change in interest rate that incites people to save/spend, so the money supply can contribute to the health of the economy, but only insomuch as it indirectly affects velocity. The difference now is that we've hit a zero lower-bound. Ideally the Fed would continue to expand the money supply to reduce the interest rate and make people spend more, but the interest rate has bottomed out, so monetary policy is no longer an option. Further increases in the money supply will do nothing but de-value the dollar.
Stein says: money velocity is on hold because people are afraid to spend.
The reality: that's really one part of a much larger situation. We can measure velocity in spending, but Stein is working from the assumption that it's only consumers that spend, and that's the big flaw in his logic. Spending is done by consumers, by corporations, and by the government, and the truth of the matter is that spending is down in all three sectors. State governments are having to drop programs and services because of limited tax revenues. As for businesses and individuals, there's the consumer confidence issue, but there's also the credit crunch issue coming into play.
You might have heard about all those banks that went insolvent recently. This makes it harder for people and businesses to get loans. Businesses, particularly large ones, require large amounts of credit to operate. When the credit market dries up, as it has, those businesses can't do business any longer, and as a result, Circuit City has to close its doors. Consumers make large purchases on credit, particularly purchases of vehicles and homes. Small wonder then that after the credit market collapsed, the home and auto sectors were hit.
Stein says: the economy is actually in better shape than we imagine with 92% of Americans employed.
The reality: any economist worth his salt will tell you that 8% unemployment is, in fact, high. It's also worth noting that unemployment rates don't count people who aren't looking for work. So there are a number of formerly two-income households in which one of bread-winners is now a full-time homemaker. If there were jobs available, they'd be employed, but since they aren't actively seeking, they don't count towards the total. So, there's that.
Also, there are more economic indicators than just the unemployment rate, and they all point South. Forecasters predict that unemployment rate will continue to rise, orders for new manufactured goods continue to sink. Single-digit unemployment does not a healthy economy make.
Stein says: if people were inspired to shop confidently, the recession would end.
The reality: not "no", but "uh-uh", as my mother would say. If consumer spending were to increase dramatically and remain increased, then that would help businesses to sell more which would allow them to hire more people which would in turn increase tax revenues and that could, theoretically, pull the economy back up. In the same way, if a dragonfly flew straight up, it could theoretically fly into the sun. Stein's understanding of the problem is too narrow and his prescription too optimistic and, well, Republican.
The way to fix this is to increase spending, and the only spending the government has any control over is its own. It could aid consumer and corporate spending by helping make the banks more solvent as well. But all in all, money has to be spent, and Stein's approach (which matches the GOP's outlook more generally) is that the best way to do this is to tell people to spend money. Or worse, a number of Republicans are in favor of balancing the budget right now. Apparently, their history textbooks' coverage of the Hoover administration is limited to his eponymous dam.
Hoover taught us that doing nothing is, in fact, a bad idea. And Japan has taught us that doing not enough is, in fact, almost as bad.
And none of this really addresses the bigger issue: that our (and by our I don't necessarily mean "the American") economy is built on imaginary money. This I have found (and continue to find) deeply disturbing. The ultimate cause of these collapses is that banks had hedged their bets with assets that turned out to be worthless. Let me rephrase that, banks were doing business, thinking everything was fine because they had all these little pieces of paper supposedly worth hundreds of dollars apiece, and they turned out to be worth tens of dollars apiece. But because nothing small happens in this country, it aggregated, and something like tens of trillions of dollars just, sort of, stopped being there so much, at all.
It's like we built a house of cards, bragged about its robustness on the grounds that we were able to build it up really damned high, and then stood in stupid astonishment when it toppled over.
And this is where I segue awkwardly into a broader point that I've noticed. Smart people, qualified people, thoughtful, forward-looking people, these are not the people that actually make the important decisions. Decisions are made by aggressive people, by ambitious people, by ill-informed people that have out-mud-slung their opponents and managed to not fuck things up so badly that they've gotten the boot (which apparently has to be pretty bad, e.g., Mario Barry). But more than that, there are plenty of smart people who are so indoctrinated that they will stand firm on their beliefs in the face of overwhelming evidence because, well, hell if I know why.
Ben Stein is a great example. He's not a dumb man, but you wouldn't know it to hear his out-gassings of late. Of course, there are plenty of educated people who are convinced that God created man on the sixth day, as told in Genesis 1 (despite the explicit contradiction with science!!!!!--also, if that statement offends your Christianity, pretend I was talking about Islam or something). I've known many, many otherwise rational and intelligent people who would switch into automatic-irrational-defensive mode the second you offer any kind of evidence there might be something less-than-perfect with their religion.
Or the whole Reaganomics thing. All empirical evidence suggests that the supply-side effect of a tax reduction would not be nearly enough to outstrip the losses of tax revenue. But no, somebody heard about it from his dad when he was twelve and can't be convinced otherwise, dammit, because he really wants to believe it. And that's really what it all comes down to. So Stein clings to an outdated and irrelevant model because it lines up neatly with what he wants to believe about the world. And, hell, the model I outlined is simple, but it's not willfully ignorant.
Okay, I'm rambling. More later,
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