The United States has entered the era of the experiment. President-elect Barack Obama is putting forward an infrastructure program whose plans and price tag are unclear. Treasury Secretary Henry Paulson whipped up the Troubled Asset Relief Program to buy up bad mortgage instruments, and, expanding on that experiment, President Bush wants to try extending TARP to autoworkers. The idea that experiments are warranted in current circumstances comes from the New Deal.
No – the logic behind the Troubled Assets Relief Program’s variation that the government make direct equity investment in troubled financial institutions by many economists including Paul Krugman:
Before I explain the apparent logic here, let’s talk about how governments normally respond to financial crisis: namely, they rescue the failing financial institutions, taking temporary ownership while keeping them running. If they don’t want to keep the institutions public, they eventually dispose of bad assets and pay off enough debt to make the institutions viable again, then sell them back to the private sector. But the first step is rescue with ownership. That’s what we did in the S&L crisis; that’s what Sweden did in the early 90s; that’s what was just done with Fannie and Freddie; it’s even what was done just last week with AIG. It’s more or less what would happen with the Dodd plan, which would buy bad debt but get equity warrants that depend on the later losses on that debt.
Paul has been critical with certain aspects of TARP but he notes that not only has the basic idea of equity infusion is what financial economic theory suggests is a viable policy means for addressing the financial crisis but it has also been successfully tried.
The logic behind fiscal stimulus in general was explained in the 1936 General Theory authored by Lord Keynes. Lawrence Summers recently explained the specific logic behind Obama’s call for an acceleration of infrastructure investment. Summers appeals to conventional economic wisdom and not some longing for the New Deal.
While her alleged ties of the current policy proposals to the New Deal falls in its face, Shlaes repeats her debunked claim that the New Deal made the Great Depression worse:
Modern economists, monetarist or Keynesian, have not rejected this story line. The trouble with the 1930s, in their view, is that government did not fiddle enough. Had the Federal Reserve, the Treasury or the White House fiddled more, the Depression might have been shorter or less severe. The New Deal Fed, they say, never got the price level quite right. Or, the New Deal stimulus programs were too little. And so on. But there is significant evidence that the very arbitrariness of the New Deal made the Depression worse.
What is this “significant evidence” you ask? Oh yea – the past writing of one Amity Shlaes! If the Washington Post really wants to make an argument against Obama’s fiscal policy proposals, might I suggest they find an economist rather than a discredited rightwing hack to make that case?