President Barack Obama sat on the plain, wooden chair, calm as always, facing CNN's Anderson Cooper, who had just asked the president which was more sobering: the daily national security report or the daily briefing on the economy. The president responded that the most alarming aspect of the crisis is how "fast the economy has been deteriorating." It explains his push for quick passage of the fiscal stimulus bill. Not everybody, however, agrees that a stimulus is necessary. Recently, the Cato Institute bought an ad in major newspapers, signed by a few hundred economists, denouncing the government spending initiative.
Professor Michael Munger, chair of the political science department and one of the ad's signatories, told me that he sees two problems with the stimulus bill: It won't have an economic effect, and the bill is simply a "subterfuge" for pork barrel spending. But what about the promised infrastructure projects we keep hearing about? Munger agrees that we have not been spending enough money on fixing this nation's bridges, but he says that the bill won't fund such important work. What's worse, he says, the vast spending will only add to our already "enormous deficit."
Professor Ed Tower of the economics department also signed the Cato Institute ad. His personal proposals are more economic than political, including eliminating the sales tax, reducing the social security tax, allowing housing to be purchased with social security savings and reducing the minimum wage and union power. But Tower's basic belief in the role of government is certainly an appropriate one in the current debate.
In an e-mail to me, Tower wrote that "government spending should be subject to careful cost benefit testing." Economic stimulus, he says, should consist of setting government to an "optimal level" and then making the private sector more efficient through tax cuts. Unfortunately, it's not all that easy-the optimal level of government spending is theoretically, but perhaps not practically, attainable. Tower has also conducted several studies quantifying lobbyists' influence on lawmakers, and the results are sickening. "When you have Congress working on which sectors will get a demand boost," he said by phone, "I'm not sure the social welfare is served."
Munger holds a similar attitude toward our government, especially in terms of how the bank bailout is being handled. "So far, the bank bailout has accelerated, and in some ways caused, the decline," Munger wrote in an e-mail. He believes that banks are just sitting on their assets and waiting for the government to offer them a higher price than they would get on the market today. So what should we do about the banks? "Let the banks go to hell." Munger argues that we should just let the banks go through bankruptcy. Tower agrees, arguing that the bank's assets should simply fall to their creditors. Munger extends this same thought to the auto industry-if a company cannot emerge from bankruptcy, "then taxpayer 'help' isn't going to help anyway."
But is bankruptcy really an option here? Professor Michael Connolly of Miami University, also a sponsor of the Cato Institute ad, agrees that it would be better for the automakers to go bankrupt rather than receive bailouts, but the financial institutions are a different matter. In an e-mail to me, Connolly said that the "bad assets" should be bought up by the government to restore solvency to the banks.
Like Tower, Connolly believes that taxes should be reduced. And, like Munger, Connolly is critical of the government, citing massive bureaucratic waste in Miami and the failure of Congress to heed the early warnings of financial mismanagement.
Nobel laureate Gary Becker, in his Jan. 19 post on Harvard economist Greg Mankiw's blog entitled "Infrastructure Spending as Stimulus," didn't take a definitive stand on the need for stimulus, but noted that the current bill could be altered to be much more effective.
And then there's the issue of protectionism. The stimulus bill includes so-called "Buy American" provisions, most notably in the case of domestic steel and textiles. Proponents argue that the bill is meant to stimulate our economy, and so the money should be spent at home. But Munger, Tower and Connolly all agreed that such an argument is a political stunt meant to win over public sentiment. Connolly cited the construction machinery company Caterpillar and its opposition to the provision because China could retaliate to U.S. protectionism by canceling orders from the company. All three referenced the Smoot-Hawley tariff that lengthened the Great Depression, a result of similar protectionist arguments heard today.
But in a world that is growing more openly protectionist as the recession deepens, do we even have another option? Connolly said that we must remain dedicated to free trade. "When China had protectionism, it was powerless and stagnant," he wrote in an e-mail, "When it opened to trade and foreign direct investment, it grew rapidly and is now becoming a superpower. If we do not lead in the fight for free trade, we will be doomed to decline."
Not one of the three signatories I interviewed was opposed to infrastructure spending on principle, but they all had their reservations about how the government would conduct these projects.
If we had a government that made sure bridges didn't collapse and transit projects weren't left unfinished, maybe there wouldn't be such suspicion of the government. If we had a government that actually limited a fiscal stimulus bill to only include fiscal stimulus spending, then maybe we would be more willing to have "faith" in our leaders, as our new tax-evading treasury secretary, Timothy Geithner, called for on Wednesday. If we had a government that effectively spent money on schools, actually tried to reduce our growing deficit and had made a real commitment to our future, maybe we wouldn't have to wonder, no matter what we do, if we'll have to deal with an inefficient government with the same selfish incentives that took down the world's financial system.
Elad Gross is a Trinity junior. His columns run on Fridays.
Get The Chronicle straight to your inbox
Signup for our weekly newsletter. Cancel at any time.