Jan. 16 (Bloomberg) — One reason the White House, Congress and the presidential candidates are talking so easily nowadays about tinkering with the U.S. economy is that economic experts have already endorsed the concept of such short-term measures.
Former Treasury Secretary Larry Summers has suggested a number for how much would be required to soften a potential recession. Nobel Prize winner Joseph Stiglitz has spoken about tax rebates. President George W. Bush, briefed by experts, may take up the stimulus concept as early as this week. In coming months, the candidates will lean hard on the experts as they battle over questions such as whether the next middle-class tax credit should be refundable (Democrats), or not (Republicans).
This is perverse. The real question about tinkering should not be "how?" but "why?" The persistence of the stimulus habit, and the endorsements by experts, makes it worthwhile to review such previous interventions and their consequences.
Back in the early 1990s, great economies confronted trouble. The savings-and-loan crisis, a recession and disappointing productivity numbers all darkened the U.S. future. In Japan, banks were foundering, and the real estate bubble had popped. The Nikkei stock index was plunging.
Under the advice of economists such as Labor Secretary Bob Reich, a new U.S. president, Bill Clinton, was considering short-term action, both for his own country and for Japan. Clinton staffers talked about a $10 billion or $15 billion outlay, or maybe a little more.
On to Japan
For Japan, the U.S. administration's vision was bolder. Treasury Secretary Lloyd Bentsen and Secretary of State Warren Christopher publicly prodded Prime Minister Kiichi Miyazawa to undertake larger interventions. Christopher called the Japanese leader's $115 billion stimulus plan merely "a useful first step."
Fortunately, Republicans and conservative Democrats tamped Clinton's domestic project down into nothing. For the rest of the decade, the Clinton team mostly stayed out of the tinkering business, with spectacular results.
Japan, by contrast, heeded the U.S. and the experts and dutifully "stimulated" the economy for years.
Late in the decade, Prime Minister Keizo Obuchi dumped billions of dollars into the economy on public works projects and tax cuts in the name of recovery. Because his Liberal Democratic Party had so many followers in rural areas, within the keiretsu business conglomerates, and among bureaucrats, the outlays were especially wasteful. A number of stimulus packages and Bridges to Nowhere later, the Japanese economy slept on.
Another egregious period of tinkering was back in the early 1970s in the U.S. "I will submit an expansionary budget this year — one that will help stimulate the economy," President Richard Nixon said in his 1971 State of the Union address.
In a statement that's so close to illogic that it's painful to read today, Nixon declared he would submit "a full-employment budget, a budget designed to be in balance if the economy were operating at its peak potential. By spending as if we were at full employment, we will help bring about full employment."
Nixon's greatest tinkering came after his Camp David retreat in 1971. He emerged from the hills to order an end to the gold-exchange standard and a 90-day freeze on wages and prices. His eight-point plan also slapped a 10 percent surcharge on imports.
One observer likened Nixon's pronouncements to those of Moses coming down from Sinai: "Thou shall raise no price, neither any wage"; "thou shall drive no Japanese car, wear no Italian shoe, nor drink any French wine, neither red nor white."
Nixon was able to move with confidence because his bad plan had been endorsed by — you guessed it — famous economists and financial officials who accompanied him to the retreat. His guests included Paul McCracken, Arthur Burns (then Fed chairman), George Shultz and Herbert Stein, the author of the biblical analogy.
What made our nation's finest minds sign on to such wrong-headed ideas? Some actually believed in them — Keynesianism, the philosophical pretext of tinkerers, was at its hottest then.
But something else played a role. The men were simply overwhelmed by the excitement of proximity to presidential power. "The Camp David establishment was arranged to give the participants a sense of their unique value," Stein wrote later, with admirable honesty.
The men were waited on by the Navy, which treated each professor "as if he were a full admiral." Stein noted that the retreat "served to separate the group from the realities of economic and political life." He said in a memoir that he asked his son Ben, (today a humorist) what to make of it all.
'Fall on Your Sword'
"Ideologically, you should fall on your sword," Ben replied. "But existentially, it's great."
Existentially, the plan was not great. Its consequences were terrible ruction for the gold market and the stagflationary 1970s. But Ben's was a perfect description of the tinkerer mentality, and of the mentality of his enabler, the economist.
The worst problem with the tinkering impulse is what it precludes: necessary permanent reform. Japan used stimulus packages as an excuse not to clean up its banks. The delay, in turn, prolonged the downturn.
Nixon, and later Jimmy Carter, focused on marketing projects like 90-day price controls and so failed to notice that Fed Chairman Burns was authorizing the creation of too much money.
The 2008 candidates such as Barack Obama and Hillary Clinton and their economists could debate the overhaul of Fannie Mae and Freddie Mac, talk seriously about making President Bush's tax cuts permanent and rewrite entitlements such as Social Security to narrow future shortfalls. But they won't, because a recession that isn't even official yet has already given them an excuse to tinker instead.
(Amity Shlaes, a senior fellow in economic history at the Council on Foreign Relations, is a Bloomberg News columnist. The opinions expressed are her own.)
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