Sunday, November 30, 2008

Would a New "New Deal" Prolong the Economic Crisis?

There are two schools of thought about the end of the Great Depression. One school says that FDR's New Deal got people working and began the end of the economic dislocation. The other school says that the Depression was crushed by spending surrounding World War II. It appears that Barack Obama is of the former school, promising a major stimulus program, but George Will argues that such a program could actually prolong the crisis instead of ending it.

"By acting without rhyme or reason, politicians have destroyed the rules of the game. There is no reason to invest, no reason to take risk, no reason to be prudent, no reason to look for buyers if your firm is failing. Everything is up in the air and as a result, the only prudent policy is to wait and see what the government will do next. The frenetic efforts of FDR had the same impact: Net investment was negative through much of the 1930s."

Barack Obama says the next stimulus should deliver a "jolt." His adviser Austan Goolsbee says it must be big enough to "startle the thing into submission." Their theory is that the crisis is largely psychological, requiring shock treatment. But shocks from government have been plentiful.
I do think that the Bush administration's reaction to the crisis has done a lot of harm. Yes, it has stemmed the worst of the bleeding, but it has also distorted the system to the point that people are watching the government and waiting, instead of investing on their own. I wonder what will really get us out of the swamp.

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