Is the Government Bailout Just Dollars and Nonsense?

Prominent economists argue that more spending is not the solution to the crisis.

March 12, 2009, 12:53 PM

March 13, 2009— -- Think we're in an economic crisis?

Politicians are eager to remind us that we are.

It's frightening just to turn on the television. You can't change the channel without hearing a politician use the word "crisis" or "catastrophe."

"A failure to act, and act now, will turn a crisis into a catastrophe," President Obama said on Feb. 4th.

"We have an economic crisis, the worst since the Great Depression," Vice President Joe Biden said of the situation at the House Democratic Issues Conference on February 6th.

Indeed, the situation is bad. The stock market has continued to fall and unemployment has reached 8.1 percent. But what should a country do about that? The political class says we need "stimulus."

And so stimulus we got, along with bailouts and rescues adding up to billions and trillions of your dollars. Everything that has been spent and promised to be spent will wind up costing each taxpayer around $16,000.

The politicians say they must take this money from you not just to bail out homeowners and financial institutions like AIG, Fannie Mae and Freddie Mac, but also to spend it on roads, schools, the arts, trains, hiking trails and more. It will jump-start our economy, they say.

"We have a consensus that we need a big stimulus package that will jolt the economy back into shape," Obama said last November while introducing his economic team, calling for immediate governmental action.

House Majority Leader Steny Hoyer agreed: "Every economist from right to left, Republican, Democrat, advises that it has to be a very substantial package," he told ABC News.

That's all we seem to hear from politicians and pundits: "Every economist" agrees that this massive stimulus is the only answer.

But that's not true. More than 350 professional economists, including three Nobel Prize winners, signed a Cato Institute petition opposing the stimulus, arguing that government spending will only worsen the situation.

"Government should, instead of increasing spending, it should cut spending," said David Tuerck of Suffolk University. He and the other economists in the petition argue that the government simply cannot spend its way out of a crisis.

"How is it the government is going to be able to spend a dollar in such a way that it generates a dollar or more in value?" asked George Mason University economist Peter Leeson. "A more likely possibility is that a dollar that government takes out of the private sector is a dollar the private sector doesn't have to spend anymore."

Building a New Bubble?

It's quite a conceit to assume that a few people in Washington are smart enough to know precisely how to spend trillions of your tax dollars. It raises the question: Because careless spending got us into this mess, should we be trying to spend our way out of it?

"Absolutely," Maxine Waters of the House Finance Committee told ABC News. "We are in an economic crisis. Government can't just sit and twiddle its fingers."

Hoyer agreed, insisting that spending is necessary because "we are in the deepest recession we have seen since the Great Depression."

Politicians and pundits alike keep saying that, but unemployment reached 25 percent during the Great Depression. It's only 8 percent today. It reached nearly 11 percent in 1982, yet few people even remember that.

"Markets go through corrections all the time," said Lydia Ortega of San Jose State University. She argues that right now the "markets need to go through this correction."

That's a reason these economists oppose the bailouts. For a market to recover, they say, it must discover its true bottom and cleanse itself of poor investment decisions. So don't bail out failing companies, let them fail, they say.

These skeptical economists also pointed out that all this government action prevents market self-correction because it causes widespread uncertainty among investors.

"They don't know what these characters in Washington are going to do," said Howard Baetjer of Towson University. "It's not clear which firms are going to be bailed out, and which ones are going to get an extra check, so investors wait and see."

In a sense, it seems as though "what they want to do is re-bubble the economy," as George Mason University economist Donald Boudreaux said. And when that bubble was created by lots of debt, should the answer be more debt?

"Most economists believe that's the case," said Majority Leader Hoyer. But shouldn't the bubble be allowed to completely pop and grow back on its own?

"Well, sure. And it's in the process of doing that. But that doesn't mean you just have to wring your hands and say 'You're on your own,'" Hoyer answered.

'Government's Not the Answer'

But what if more government action only causes more damage? It seems like the stock market plunges nearly every time there's an announcement of more intervention.

"It's the government's own policies that contributed to the bubble," argued Suffolk University economist Ben Powell. "The government's not the answer to it."

In order to finance all this spending, the government "either has to raise taxes or print more money," pointed out economist David Tuerck. But printing more money creates inflation, and that makes each dollar worth less. This can cause great harm to the average consumer.

If we continue to print more money, "we will look like 1920s Germany where you had to take a bushel basket full of money to the store in order to buy a loaf of bread," said Tuerck. "This represents a huge burden on future generations that we can't fix, except by printing more money, and that's where we're headed."

When asked whether massive government spending could result in such hyperinflation, Majority Leader Hoyer replied: "We hope it doesn't."

Despite all the issues brought up by opponents of the stimulus, the government doesn't seem to be thinking twice about hastily spending so many tax dollars. You'd think lawmakers would be absolutely certain that this will solve the crisis.

But is Hoyer sure that all this spending will definitely work?

"I hope so," he said.